The current account deficit of Argentina revives concerns about the exchange rate

A current account deficit

The current account, which measures the difference between the income and expenses of foreign exchange for goods, services, income and transfers, reflects a growing imbalance in the external transactions of Argentina. The deficit of US $ 5,191 million in the first quarter of 2025 contrasts with the US $ 903 million surplus of the previous quarter, or of the US $ 176 million of the first quarter of 2024, evidencing a deterioration in the external position of the country. The main factor was the balance of services, which registered a deficit of US $ 4,502 million, with tourism expenses contributing US $ 3,464 million to red.

Although the balance of goods maintained a surplus of US $ 2,060 million, this result represents a 60% drop compared to US $ 5,070 million of the first quarter of 2024, indicating a significant weakening of the result. For its part, the financial account showed a net income of capitals of US $ 7,229 million, driven by the use of external assets and greater indebtedness, which allowed to temporarily finance the current account deficit. However, this dependence on external capital flows raises serious doubts about long -term sustainability, especially in a context of limited access to international credit markets.

The late exchange rate as a catalyst

The core of the problem lies in Argentina’s exchange policy. The actual appreciation of the weight, evidenced by a multilateral real exchange rate (ITCRM) that averaged 80.4 points in the first quarter of 2025 – we think above the level of 79.8 prior to the devaluation of December 2023 -, it has increased the country in terms of dollars. Indicators such as the Big Mac Index of The Economist, which positions Argentina with the second most expensive Big Mac in the world to 7 dollars, or a survey of El País that points to Buenos Aires as the city with the most expensive coffee in Latin America, reflect an increase in internal prices against a relatively stable nominal exchange rate. This has stimulated the demand for imported goods and trips abroad, exacerbating the external deficit.

The tourism sector clearly illustrates this dynamic. In the first quarter of 2025, expenses for travel abroad reached US $ 4,923 million, far exceeding US $ 1,459 million entered by foreign visitors, which resulted in a net deficit of US $ 3,464 million. May data show a 48.9% increase in issuer tourism and a 10.1% drop in receptive tourism, a gap attributed to the appreciation of weight.

The change towards a flotation regime administered in April 2025, which replaced the previous Crawling PEG and “Dollar Blend” scheme, has marginally improved competitiveness. The ITCRM rose to 86.6 points after a nominal depreciation of 8.9%, but this adjustment is insufficient to correct the exchange delay. The services in services matched the total of 2024, a clear sign of an explicit appreciation of the exchange rate.

Government’s response: Optimism under scrutiny

Javier Milei’s government has tried to minimize the severity of the deficit, presenting it as a byproduct of robust economic growth. In Congress we are SMEs, the Minister of Economy, Luis Caputo, said that the deficit is “absolutely reasonable and even healthy for an economy that grows at 6%.” In a similar line, the Deputy Minister of Economy, José Luis Daza, said at the Argentine Institute of Finance Executives that a deficit of 2% of GDP is “expected” in an expanding economy.

The government emphasizes that the deficit is mainly driven by the private sector – family and companies – thanks to a fiscal surplus. However, this narrative omits the public sector contribution to the demand for foreign exchange, which includes interest payments of external debt and trips abroad from public employees, which also affect the tourist deficit.

The Secretary of Finance, Pablo Quirnodefended the exchange policy in X, stating: “The dollar floats, and if someone considers that it is late, they can make decisions accordingly”. However, the increase in tourist spending and import demand suggest that market actors are already reacting to an overvalued weight, which aggravates external imbalance. In May, one million people bought US $ 2,262 million in foreign currency, reflecting an accumulated demand for dollars in a context of appreciation of the peso.

Implications for Investors and PolicyMakers

The growing current account deficit ignites alerts on the external vulnerabilities of Argentina. Historically, persistent deficits have been financed through foreign direct investment (FDI), indebtedness or use of international reserves. However, Argentina’s options are limited for their restricted access to international credit markets. This model closes with more indebtedness, but the history of Argentina shows that high deficits financed with debt are rarely sustainable.

The Government is confident in the growth of exports to restore external balance. Sectors such as agriculture, mining and energy – impulsed by developments such as Vaca Muerta – are projected to generate a commercial surplus of US $ 50,000 million by 2032 or 2033. However, the fall in international commodities prices, the increase in import demand, fueled by economic recovery and a strong weight, and the difference in speeds between demand and supply of dollars could undermine these projections.

The exchange rate dilemma

The exchange delay is the core of the external challenges of Argentina. However, the Government has resisted calls to the elimination of restrictions, prioritizing the stability of the floating exchange rate and avoiding an inflationary rebound, which remains a concern despite its stabilization. The vice governor of the BCRA, Vladimir Werningexpressed confidence in the current regime, highlighting the accumulation of US $ 2,000 million in reservations through repurchase agreements.

However, the administered flotation, with its intervention bands, is insufficient to correct structural overvaluation. A broader liberalization of the change market – allowing companies, not only to individuals, freely accessing dollars – is necessary to relieve pressure on the exchange rate.

Perspectives: Risks and opportunities

Facing the second half of 2025, the current account trajectory will depend on several key factors. First, the government’s ability to boost exports in sectors such as agriculture, mining and energy will be crucial. Second, the accumulation of international reserves will determine the ability of the BCRA to manage exchange pressures. Third, the result of negotiations with the IMF, which projected an annual deficit of US $ 2,700 million, much lower than current estimates, will influence access to external financing.

Government’s fiscal discipline and GDP growth of 5.8% in the first quarter of 2025 can generate some confidence. However, the combination of an overvalued weight, an increase in external debt and a deficit driven by both tourism and the increase in imports raises the risk of exchange volatility, especially with the 2025 endings on the horizon on the horizon. Greater pressure on the dollar is expected, which could approach the upper limit of the flotation band by the end of the year.

Conclusion

The government fiscal surplus, an undeniable achievement, does not seem sufficient to counteract the pressures of a current account deficit that threatens external stability. The developments in Vaca Muerta, the countryside and mining are promising, but are not enough to compensate for the growing demand for dollars for imports, tourism, external debt payments and treasure. The dependence on international credit markets, in a limited access context, increases the vulnerability of Argentina.

The solution lies in allowing the change market to work with greater freedom, including companies, to correct the exchange delay through the price. Without a decisive action to address the appreciation of the weight, the current account deficit could erode tax progress.