Milei's dilemma: how to solve a problem like Argentina?

Milei's dilemma: how to solve a problem like Argentina?

Argentina's president-elect Javier Milei surged to power on a wave of anger over decades of economic mismanagement, vowing to ditch the peso for the US dollar, shut down the central bank and slash spending
Argentina's president-elect Javier Milei surged to power on a wave of anger over decades of economic mismanagement, vowing to ditch the peso for the US dollar, shut down the central bank and slash spending. Photo: Luis ROBAYO / AFP
Source: AFP

Argentina's president-elect Javier Milei will have no time to bask in his Sunday victory as he inherits a country crippled by inflation and short on cash, creditors and international sympathy.

"Being president of Argentina has got to be one of the worst jobs in politics in the world," said Benjamin Gedan, director of the Argentina Project at the Washington-based Wilson Center.

"The problems have become so deep and complex and intertwined that they're not easily solvable, even if they're easily identifiable."

Milei surged to power on a wave of anger over decades of economic mismanagement, vowing to ditch the peso for the US dollar, shut down the central bank and slash spending.

He has promised "the end of Argentina's decline" and warned there is no time for "gradualism... or half-measures."

He will take office on December 10, and analysts predict a rocky ride with inflation at 143 percent and poverty levels of over 40 percent.

Read also

Austrian property tycoon's troubles rattle investors

How and when will he dollarize the economy?

Analysts warn the volatile Argentine peso is ripe for devaluation
Analysts warn the volatile Argentine peso is ripe for devaluation. Photo: Luis ROBAYO / AFP
Source: AFP

Milei has proposed the dollarization of the economy by 2025 to halt the "cancer of inflation", meaning he would drop the peso and Argentina would lose control over monetary policy such as setting interest rates.

Dollarization requires a hefty stock of greenbacks, and the International Monetary Fund (IMF) has warned Argentina's dollar reserves are dangerously low.

Even with the backing of the center-right opposition, political newcomer Milei has "very little legislative power," said analyst Carlos Gervasoni of the Torcuato Di Tella University.

"So there is no way to pass laws that, for example, require changing the country's currency or closing the central bank."

What will happen with the peso?

To try and keep a lid on inflation, the Argentine government has for years strictly controlled the exchange rate of the peso to the dollar, which was frozen for three months before the election and is now being allowed to devalue at three percent per month.

Read also

First French ski reports open, but only at high altitude

Supporters of Argentine president-elect Javier Milei celebrate his victory
Supporters of Argentine president-elect Javier Milei celebrate his victory. Photo: Emiliano Lasalvia / AFP
Source: AFP

The exchange rate is "a total fiction. And to maintain it is extremely expensive. Argentina just has literally no money. It can't continue doing this," said Nicolas Saldias, a senior analyst with the Economist Intelligence Unit.

Between now and when Milei takes office, "things could rapidly scale out of control in those weeks. That's a period of a lot of instability," said political analyst Ana Iparraguirre of GBAO Strategies.

Saldias said people may panic believing dollarization is imminent, sparking a run on the peso.

Economy Minister Sergio Massa, whom Milei beat in Sunday's polls, may also implement a long overdue devaluation of the peso, making Milei "pay the political price."

"You'll probably see inflation ramp up very quickly," said Saldias, warning of possible hyperinflation.

Will Milei take a chainsaw to state spending?

Milei often appeared on stage at rallies with a chainsaw, vowing to slash public spending by 15 percent, privatize state companies and reduce subsidies on fuel, transport and electricity.

Read also

Moody's affirms Italy's credit rating and upgrades outlook

Such belt tightening has long been demanded by the IMF, which has bailed out Argentina 22 times, most recently with a loan of $44 billion dollars in 2018.

But Milei will face the same challenges as predecessors who have tried to get out of a vicious cycle of budget deficits, debt, money printing and inflation.

Untangling the country's economy is tricky. Removing subsidies or slashing welfare payouts would only further worsen poverty, and floating the currency would make imports much more expensive.

"At this point everything you fix worsens a second problem," Gedan said.

"The pain will be acute and spread widely if there is a serious stabilization program and it's not clear that Argentines will see the upside."

There is also the danger of protests and social unrest, especially given that almost half the country did not want Milei in power.

Is there any good news?

Gedan said that if Milei and his allies in the opposition do manage to curtail spending and reduce welfare and subsidies while protecting the most vulnerable, "this could be a turning point for the good."

Read also

Winds of change? Bid to revive England's onshore sector

There are other positives on the horizon.

After Argentina's worst drought in a century, which saw agricultural exports plummet in the past two years leading to a $20 billion shortfall in revenue, the country is expecting a bumper harvest in 2024.

Milei will also benefit from an estimated $10 billion in annual savings in energy imports as a new gas pipeline ramps up production from southern Vaca Muerta -- a massive oil and gas reserve -- estimates economist Elizabeth Bacigalupo of the Abeceb firm.

New feature: Сheck out news that is picked for YOU ➡️ click on “Recommended for you” and enjoy!

Source: AFP

Authors:
AFP avatar

AFP AFP text, photo, graphic, audio or video material shall not be published, broadcast, rewritten for broadcast or publication or redistributed directly or indirectly in any medium. AFP news material may not be stored in whole or in part in a computer or otherwise except for personal and non-commercial use. AFP will not be held liable for any delays, inaccuracies, errors or omissions in any AFP news material or in transmission or delivery of all or any part thereof or for any damages whatsoever. As a newswire service, AFP does not obtain releases from subjects, individuals, groups or entities contained in its photographs, videos, graphics or quoted in its texts. Further, no clearance is obtained from the owners of any trademarks or copyrighted materials whose marks and materials are included in AFP material. Therefore you will be solely responsible for obtaining any and all necessary releases from whatever individuals and/or entities necessary for any uses of AFP material.