Around Argentina in 80 Days: Milei's Initial Efforts
3 March 2024
In the first 2.5 months of management Milei has achieved a lot. A recent visit by IMF’s deputy management director Gina Gopinath was a key endorsement. She met all the establishment and left with good vibes, but also seized the opportunity to outline several challenges. She also left it crystal clear that dollarization is not something Washington likes. Milei has already adjusted his rhetoric towards currency competition, rather than full-blown dollarization.
Overall, there is little doubt that the program will be approved, which does not mean, however, that all problems are solved. But if we surf through the most urgent indicators following a disastrous inheritance, it should be noted that the Central Bank bought just over 8 billion dollars in the market with an increase in reserves of USD 6 billion. The monetary base remained stable in nominal terms, representing a reduction of more than 30% in real terms. Import debts have begun to get back on track, although there is a long way to go.
Perhaps what was most notable was January's financial surplus, the first in nearly 12 years. This is Milei's trademark as his conviction to eliminate the deficit was never in doubt. February's numbers also seem to be good. There is no doubt that the January issues are something to be excited about, but there is a lot of fine print to read. It does not appear that the numbers can be extrapolated because there is much spending that has not been paid. Also, pensions and salaries grew well below inflation, something that cannot be sustained for social and mathematical reasons if inflation were to come down. Thus, in this matter the news is good, but not all that glitters is gold.
Monthly inflation began to ease from the initial 25.5%. The diagnosis of hyperinflation always appeared exaggerated, and the coming months’ numbers encourage optimism. However, there is a floor (perhaps 7 or 8%) from which it will not be easy to descend if the government does not go beyond ordering the fiscal accounts and aligning relative prices. Such moves will have to be assessed over the next few months.
The exchange rate issue is the most challenging macro theme. This is due in part to the fact that the current exchange rate appreciation has fiscal complications. In January, the level of export and import taxes shone among the government’s revenue stream, but with a stronger currency, those dollarized incomes lose weight. Most likely, Argentina needs a weak peso; one can argue just how weak as well as in what timeframe. While the real exchange rate in February appears sufficient, the 2% monthly crawling peg may not by April. It is understandable that the government thinks that nothing needs to be changed when it buys millions of dollars on the market. A primary concern is forward-looking and especially knowing that the demand for dollars is still suppressed. Sooner or later FX restrictions will have to end. Let us remember that exchange rate unification is not only something that the IMF requested but is also part of the normalization strategy that any government should pursue. There are no easy ways out. A steep devaluation is politically painful. Accelerating the crawling peg conspires against the CPI numbers and may force the Central Bank to increase interest rates. Keeping the 2% monthly peg will enable a quite strong peso in two months-time given inflation dynamics.
Perhaps the biggest challenge is on the social and political side. We have already seen the difficulties of a politically weak government with little management experience to pass the “omnibus” law. Now, with the smaller versions of the law, it will have another chance. Public opinion is another major stumbling block. Argentina is going through the worst of the recession. February's measurements were not bad for the government, but there is no guarantee that this will continue for another few months. During this time, it is unlikely that there will be an improvement in activity or employment. This brings us to the social issue. This government inherited country with poverty rates greater than 40 percent. Although it is not their fault, the development of the social situation is a key input for the political and economic stability of the ruling party. Therefore, maintaining a balance between the need to put the accounts in order and social policy becomes one of the key variables where there does not seem to be much margin for error.
In short, the macro and financial aspects have scored well so far, even if the problems need more time to be resolved. The political and social approach surely needs a twist. Milei is a great communicator. He needs that temperance and a strategic eye to carefully choose his battles. The problems from the current battle with provincial governors are a fine example of the problems that could have been avoided.