The Economist: From hyperinflation to hope - Argentina's Milei bets big on reform

Key topicsMilei unveils $20bn IMF deal, eases capital controls, floats the pesoStrikes erupt as inflation risks and spending cuts stir discontentMarkets optimistic, but political hurdles and global chaos loom.Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here.Support South Africa's bastion of independent journalism, offering balanced insights on investments, business, and the political economy, by joining BizNews Premium. Register here.If you prefer WhatsApp for updates, sign up to the BizNews channel here.From The Economist, published under licence. The original article can be found on www.economist.com© 2025 The Economist Newspaper Limited. All rights reserved..The Economist.“Instead of talking about growth at Chinese rates, the world will soon be talking about growth at Argentine rates,” crowed Javier Milei on late-night television on April 11th. His economy minister had just outlined a $20bn IMF programme, a reduction in capital controls and a shift to a more flexible exchange rate. Yet not everyone in Argentina is so triumphant. On April 10th, soon after the news of the IMF deal first broke, a pre-planned general strike against Mr Milei’s spending cuts paralysed the country. Jorge Newbery Airport in Buenos Aires, the capital, was left empty. Trains and subways were silent. Uncollected rubbish mouldered on the streets.Many of Argentina’s 22 previous IMF programmes have ended in disaster. Mr Milei’s record gives some credibility to his insistence that this time will be different. In December 2023 he inherited rampant government overspending, soaring inflation and a byzantine tangle of capital controls and exchange rates. He slashed spending immediately, pulling inflation down sharply. A deep recession is now giving way to strong growth. The rate of poverty, which rose to 53% of all Argentines in early 2024, has now fallen back to 38%, lower than it was when Mr Milei took office. Now he is tackling the weakness in his reform program: capital controls and the overvalued peso. Mr Milei has never been closer to transforming Argentina into a normal economy. But global economic chaos endangers his reforms, and politics could still trip him up.Until April 14th Mr Milei maintained capital controls and kept the exchange rate on a “crawling peg”, which initially devalued the peso by 2% against the dollar each month. That pulled down inflation, but while it was still running at more than 2% a month, the peso became overvalued. Capital controls deter foreign investors and the “super peso” made exports costly relative to local goods and prompted markets to bet that its value would fall. That threatened a crisis. Since mid-March the central bank has spent about $2.5bn to prop up the exchange rate. By April 11th its foreign reserves were some $7bn in the red (see chart)..Now, pushed and supported by the fund, Mr Milei has acted. A big slug of IMF cash—$12bn right away and another $3bn over the course of this year—will help the central bank defend a more flexible exchange-rate regime. Reserves are further boosted by $6.1bn that is expected to be lent by multilateral banks and a $5bn swap line with China. The official exchange rate will now float between 1,000 and 1,400 pesos to the dollar. The central bank will only sell dollars to defend the peso if it approaches the 1,400 limit. Should Argentines seem to be ditching too many pesos for dollars, the central bank will offer juicy high interest rates in pesos.This strategy is courageous, because it is risky. By mid-afternoon on April 14th the peso had slumped by 12% to 1,230 to the dollar. Yet Capital Economics, a consultancy, reckons that still overvalues the peso. “At some point the market is going to test the upper band,” says Martin Redrado, a former head of the central bank, now with Fundación Capital, a consultancy. The “strength of the central bank’s response will be crucial”..Read more:. Milei’s crypto blunder sparks political storm – Juan Pablo Spinetto.The government has also reduced capital controls to make it easier to take money out of Argentina. That will help attract foreign investment, but raises the risk of sudden outflows. For that reason some big controls remain, including on billions in past foreign dividends that have long been stuck in the country.The reforms should make it easier for the central bank to accumulate reserves of its own, not just those lent to it by the fund. Argentina needs those to have any chance of borrowing in global capital markets, which it wants to start doing early next year to help roll debts over. Some $19bn is due in 2026. Early signs are good. Argentine international bonds jumped by about 3% in early trading, suggesting that markets approve of the plan.Global economic chaos makes it harder to carry out. Mr Milei loves the United States’ president, Donald Trump, but Mr Trump’s trade war has caused a sharp drop in the price of oil and threatens the price of agricultural commodities. This weakens earnings from two big Argentine exports and makes it harder to build up reserves. The mayhem also makes for risk-averse investors, already wary of Argentina, a serial defaulter. Perhaps to compensate, on April 14th Scott Bessent, the United States’ treasury secretary, stepped away from firefighting and went to Argentina to meet Mr Milei. That is a symbol of support, though as this article was published nothing concrete had been announced.The risk for Mr Milei is that these sweeping reforms lead to inflation, and that to dicey politics. The peso’s depreciation will almost certainly increase inflation. It already rose to 3.7% monthly in March, up from 2.4% in February. A further rise to around 5% monthly is likely, says FMyA, an economics consultancy. Mr Milei’s hope is that any rise lasts only a few months, and ends before the October midterm elections.Falling inflation is the basis of Mr Milei’s popularity. Argentines may be angry if it rises further, especially as in his triumphant speech on April 11th Mr Milei declared that “inflation is going to collapse”. The danger is a vicious circle in which inflation rises and Mr Milei’s popularity falls, markets get spooked, economic problems mount, Mr Milei’s popularity declines even more, and so on. In an attempt to pre-empt spooking, the government has promised even more aggressive spending cuts. That will anger many Argentines already suffering—and striking.Mr Milei is already under political pressure. On April 3rd the Senate rejected two of his nominations for the Supreme Court, which he had controversially tried to ram through by decree. Soon after the lower house voted to open an investigation into Mr Milei’s promotion in mid-February of a dodgy cryptocurrency, which crashed in value hours after he boosted it on social media. The crypto scandal undermines his narrative about fighting the corrupt “caste”.At 45% his approval rating remains strong, but it has fallen since the beginning of the year. Markets will be watching upcoming regional elections, followed by the midterms, for any sign that spendthrift Peronists might be set for a comeback. No structural reform is more important for Argentina than excising radical Peronist economic policy, says Alejandro Werner of the Peterson Institute, a think-tank in Washington.The trouble is that Mr Milei lacks allies. He is most obviously aligned with the party of the centre-right ex-president, Mauricio Macri. But while there is talk of a united front, there are also plenty of gripes. That could open the door to the Peronists in elections in both Buenos Aires city and province. A big Peronist win in the latter could scare markets, warns Ignacio Labaqui of Medley Advisors, a research firm.Even if the midterms go well, they will not bring Mr Milei as much power as he would like. While his party, which holds just 15% of the seats in the lower house and less in the Senate, hopes to make big gains, the structure of the election is against them. Only half of the lower house and a third of the Senate is up for grabs.He is fortunate that the Peronist opposition is embroiled in infighting over its leadership. The road ahead remains difficult, but for now, remarkably, Mr Milei looks more likely than not to pull off his transformation of Argentina’s economy.

The Economist: From hyperinflation to hope - Argentina's Milei bets big on reform

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