đź”’ Argentina’s president Javier Milei faces economic turbulence as inflation soars

In the wake of Argentina’s economic turmoil, President Javier Milei’s bold promises of “shock therapy” are put to the test. Since taking office, inflation has soared, pushing consumer spending to new lows and plunging the country into its sixth recession in a decade. Yet, amidst challenges, Milei remains resolute, vowing to slay inflation and balance the books. With high stakes and mounting pressure, Argentina’s fate hangs in the balance as Milei charts a path toward recovery.

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By Patrick Gillespie

Argentina’s new president, Javier Milei, warned voters on the campaign trail that the “shock therapy” he would use to stabilize the country’s serially ailing economy would be painful, and his prediction has come true. ___STEADY_PAYWALL___ Consumer price inflation has accelerated since Milei took office on Dec. 10: Prices rose 71% through February — and 276% from a year earlier — after he scrapped price controls, devalued the currency and started to cut subsidies that held down prices for transportation and utility bills.

Javier Milei, presidente de Argentina.

Wall Street investors have cheered on Milei and pulled Argentina bond prices out of the gutter. But consumer spending has tanked as high inflation devours wages and pension payments, with the country falling into its sixth recession in 10 years. Milei says his kitchen-sink approach to fixing the economy is necessary to correct the destructive policies of his predecessors, whom he faults for a poverty rate that’s approaching 42%, just below the peak reached during the Covid-19 pandemic and up from 26% in 2017.

Milei’s approval ratings remain high as he predicts a V-shaped economic recovery with robust growth after all the pain subsides. Voters express confidence in surveys that the president will bring down the inflation rate over the next year.

Here are four challenges Milei faces as he pushes for deep government spending cuts that could further test the public’s appetite for change. 

1. Slaying Inflation 

Milei often says his top mandate is to crush inflation, a longtime problem that’s doomed so many of his predecessors. But that will require fixing Argentina’s many structural problems, including a chronic fiscal deficit and a dependency on currency controls — moves that are likely to only worsen inflation in the short run.

Milei stopped letting the central bank print money to fund government spending as it had during the previous administration. He’s also resisting calls to increase the supply of pesos in circulation to match the rising consumer need for cash.

He and his economic team point to some early success: After a big spike in the inflation rate in December, monthly inflation cooled in January and February. Private economists say that trend may have continued into March, albeit with inflation still above 10% per month and nearing 300% annually. That’s more than 100 times the annual rate in the US and Europe. But with wages up only 181% from a year ago, Argentines’ diminished buying power is crushing consumer spending and limiting, to some extent, how much businesses can keep jacking up prices. 

Many economists express concern that Milei’s strategy to put a lid on inflation is sending Argentina deeper into recession, which isn’t a sustainable way to cool prices. Milei has yet to roll out what locals call a stabilization plan spelling out how the economy will grow and incomes will recover without a big spike in prices.

2. Balancing the Books

Milei is aggressively attacking Argentina’s core problem: a chronic fiscal deficit that’s prompted recurring debt defaults and currency crises. The government posted fiscal surpluses in January and February, but mostly by slashing pension benefits by more than 30% after adjusting for inflation, a strategy investors view as unsustainable. Milei is also in the process of cutting at least 70,000 government jobs and slashing budgets for bloated state-run companies.

To more fully balance the books, Milei plans to cut generous subsidies that made the price of a subway ride in Buenos Aires as low as 6 cents last year. Eliminating subsidies have proved to be politically costly for earlier presidents, and Milei has already postponed some price hikes for utilities and public transit after increasing fares once in February. A plan to increase subway fares in April to 574 pesos (about 67 cents) from 125 pesos was pushed back a month, with the government citing “technical issues.” Similar delays are occurring for buses, commuter trains and utility bills.

How quickly or slowly Milei takes these perks away from Argentines could have a big impact on the fate of inflation and his popularity, which for now is helping him resist caving to lawmakers’ demands to send more federal funding to the country’s provinces.

3. Winning Support From Lawmakers

Milei hasn’t passed any big laws yet: His first policy changes, such as the peso devaluation, didn’t require lawmakers’ approval. But he does need congressional support for many of his other long-term libertarian projects, such as opening up Argentina’s economy to free trade. Trouble is, the president is far less popular in congress than he is with voters. His nascent political party holds less than 15% of the seats in the legislature, which he has called a “rat’s nest.” Milei campaigned against the political establishment and continues to insult some lawmakers in the press and on social media. His legislative strategy remains muddled by his tense relationship with the establishment he promised to fight against. 

His flagship package of belt-tightening measures didn’t make it through the lower house of congress, while senators pushed his decreed deregulation measures to the edge of collapse after voting to repeal them and sending them to a vote in the lower house later this month. 

Now, Milei is trying to reset his relations with the country’s powerful governors, whose provincial purse strings often control the votes of senators and lower house lawmakers in their respective districts. The president has proposed a 10-point pact for governors to sign — which, in addition to the free-trade provision, also includes a mandatory balanced budget and a reduction of government spending to 25% of gross domestic product from 37% in 2022 — in exchange for “fiscal relief.” That’s probably a reference to discretionary funding for provinces that Milei has withheld as part of his austerity push.

He’s also trying to revive a half-size version of the belt-tightening legislation, known as the “omnibus law,” that failed to pass. Among the revisions, he reduced the number of state-run companies he’d privatize and scaled down proposals intended to limit government spending, including one that would give Milei unilateral power to pass any economic policies. 

4. Re-Entering Debt Markets

Milei inherited a cobweb of currency controls that put the peso essentially in a financial strait jacket by making it hard to exchange them for other currencies. To avoid a wide-scale currency selloff, the government since 2019 has allowed Argentines to legally exchange pesos for only as much as $200 a month and required them to pay a bank three fees that substantially increase the cost of currency exchanges.

The removal of currency controls, which has been a key barrier preventing Argentina from returning to international debt markets, has been eagerly anticipated by investors since the government defaulted on its sovereign bonds in 2020. While welcome by businesses, lifting controls in the near term runs the risk of catapulting inflation even higher into triple-digit territory. That’s because consumers and companies alike could rush to buy dollars and sell pesos at significant levels for the first time in years, pushing down the value of the Argentine currency

Milei intends to discard the controls so Argentina operates more like a normal economy with one exchange rate instead of a dozen â€” one set by the government, another by public markets, another by black markets. But he hasn’t detailed the exact steps or timing, though hinted the process could start sometime in mid-2024. 

Disarming all the controls is also a key step for Milei to realize his key campaign promise: Allowing the peso and US dollar to co-exist as legal forms of payment — which could result in the full “dollarization” of the Argentina economy if people, given a choice, abandon the peso. But in late March, he conceded dollarization probably wouldn’t happen before mid-term elections in late 2025. 

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