Financial analysts and the International Monetary Fund are reacting to the much-anticipated first step of the new government in Argentina to fight the country’s runaway inflation and 45% poverty rate.
In a news conference, the new Economy Minister, Luis Caputo, announced a plan to devalue to Argentine peso to 800 per dollar and eliminate the fiscal deficit of the central government by reducing the number of ministries by half and cutting energy subsidies, all of which Caputo admitted would be “painful”.
The recently-elected President of Argentina, Javier Milei, is the world’s first Libertarian head of state. He now takes control of a country that is the poster child for poor economic management, has maintained government deficit spending for 114 of its 123-year history, and is currently dealing with annualized inflation of 200%.
Wielding a chainsaw at political rallies, Milei reflected his goals of blunt and unprecise rollbacks in government spending, size, and control over the economy, and to a degree voters listened.
Banks, financial markets, and businesses were all preparing for a currency devaluation for two reasons. The first is that Milei campaigned on replacing the peso with the US dollar as the nation’s official currency, and the second is that Argentine authorities have for years kept the peso from freefalling with strict currency controls; establishing artificial exchange rates of their currency against dozens of others on 12 separate occasions, severely hampering investment in the country which is South America’s second-largest economy.
“We’re always worse off because our response has been to attack the consequences but not the problem,” Caputo said in his address relating to this issue. “What we’ve come to do is the opposite of what they always did, and that’s solve the root problem”.
The root of the solution
“The devaluation announced exceeded market expectations,” Shamaila Khan, Head of Fixed Income for Emerging Markets and Asia Pacific at UBS Asset Management, told Euronews. “Some details were announced on the fiscal adjustment that will be needed such as reduction of subsidies and decrease in public expenditure. Implementation will be key”.
Markets were expecting a 27% devaluation, and the tougher measures sent hope soaring—with the S&P Merval index, the flagship index for Argentina, rising 491% year over year.
Anyone betting on a Milei presidency has done very well on that gamble, but it isn’t just traders that are looking favorably on the measures announced by Caputo and Milei. Argentina has long sought financing aid from the International Monetary Fund, but the country is currently “wobbling” on a $44 billion bailout they received.
“IMF staff welcome the measures announced earlier today by Argentina’s new Economy Minister, Luis Caputo. These bold initial actions aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime,” Julie Kozack, IMF director of communications, said in a press release after the news.
Both Caputo and Milei have acknowledged that this process will make the effects of inflation even more severe in the short term, a warning they have issued repeatedly to supporters and opponents to tamper expectations, but both have insisted they are necessary to avoid “catastrophe”.
“The objective is simply to avoid catastrophe and get the economy back on track,” Caputo said in his speech.
However as Euronews reports, Milei’s Libertarian Party is totally outnumbered in the legislature and holds no majorities or executive positions in any provincial or municipal governments. Potential deal-making could interrupt or distort the measures proposed by Caputo. It is the bureaucratic class that Milei is seeking to do away with, and ironically he will need at least some of their own support to do it. WaL
PICTURED ABOVE: The 100 peso note, or about one-eighth of a US dollar under Milei’s plan. PC: Ryan Thompson. CC 2.0.