No tears for Argentina’s new president as he gets off to a good start

It’s just as well that Argentina’s Javier Milei appears to have the bolas worthy of his country’s Criollo bulls. He will need every ounce of their power because the outlook for Argentina is more dire than the self-professed anarcho-capitalist may have feared when he took office less than a week ago.   

The new Argentine president knew he was facing the most volatile of economic situations. It’s why Milei carried a chainsaw with him on the campaign trail to illustrate how he planned to slice through the country’s massive problems, fuelled by decades of profligate socialist over-spending and appalling economic mismanagement which has left Argentina begging from the IMF punch bowl. 

Once one of the most prosperous countries in the world with Buenos Aires seen as the “Paris of South America”, Argentina today is on its knees. For 113 of the last 123 years, the country has run big fiscal deficits. Inflation is nearly 160 per cent, the central bank has negative reserves, the country has a “debt bomb” of around $400 billion owed to local and global creditors with about $16 billion due next year, benchmark interest rates are at 133 per cent and around half of its 46 million population are living close to poverty levels. 

If this is not enough to cope with, the 53-year-old economist and former TV pundit is about to discover that South America’s third-biggest country has plunged into recession. According to the latest Reuters poll, Argentina is now in a technical recession – two straight quarters of economic contraction – as of the third quarter. It’s expected that official figures out later today will show the economy contracted by 0.7 per cent in the latest quarter after shrinking 4.9 per cent in the previous quarter.

With the economy already on the floor, the country’s consumption has been battered on several more fronts. Exports have been hammered by a devastating drought which has crippled the country’s valuable grain crops. At the same time, continuous peso devaluations along with difficulties in importing goods because of harsh capital controls and the lack of foreign currency reserves have worsened the economic situation that Milei has inherited. 

Yet this disaster is precisely why Milei swept to power in the recent stunning elections. You can see why. His promise of radical reforms such as dollarisation and abolishing the central bank – which is blamed for rocketing inflation because of having turned on the printing taps – appealed to a population that has suffered so much. 

Never mind that Milei’s promises were some of the wildest and most dramatic ever to be offered at the voting booth but what they did was offer hope for the first time after decades of corruption and economic malaise.

And the verdict so far? By all accounts, Milei has not done too badly at all in his ambition to drag Argentina out of “decades of decadence”.  He’s devalued the peso by more than 50 per cent as part of the emergency measures but put abolishing the peso and converting the currency to the dollar on the back burner – for now. The move changed the official conversion rate to 800 pesos per dollar from 365 pesos. For years, the peso has been artificially supported by strict capital controls, with its value falling 52 per cent this year against the US dollar. More surprisingly, Milei is working closely with the IMF and has its backing. But perhaps not that surprising for an establishment rebel – Argentina owes the IMF a cool $110 billion.

However much he plays the goofy outsider, Milei is too astute an economist to not know that he has to work with institutions such as the IMF and keep them and the bond markets on his side. He’s not going to do a Liz Truss and give in to the bond vigilantes.  And however much he self-declares as the libertarian rebel, it’s worth remembering he is also a member of the World Economic Forum. Work that one out. 

Even so, to get Argentina and the ratings agencies onside – crucial as the country has billions to pay off next year – is not a bad start. Indeed, the IMF has given the outline of the plans made by his economic minister, Luis Caputo, the thumbs-up as have some credit rating agencies. This is important because of the outstanding bond repayments due next year although Fitch still predicts a debt default or a debt restructuring some time soon. 

However, the IMF’s comments were nicely positive, welcoming Milei’s actions which “aim to significantly improve public finances in a manner that protects the most vulnerable in society and strengthen the foreign exchange regime.” From the IMF, that’s praise indeed.

As well as the peso devaluation, Milei’s first reforms include halting all public infrastructure works pronto. Full-stop. This ban is of huge significance as some of the country’s most egregious corruption has been between politicians and the business community sharing the proceeds of government contracts. 

What’s more telling is Caputo went on TV publicly stating that these contracts were being stopped because of corruption: that’s like declaring war on the mafia. It also went far to show that Milei’s chainsaw was not merely a prop after all. Along with the ban, Caputo also announced plans to stop all labour contracts that have been operating for less than one year, to reduce energy and transport subsidies, bring some companies into state hands and slash the number of government departments from 18 to nine. (Truss will be gnashing her teeth with envy.) 

But what about Milei’s most radical plans to swap the peso for the dollar and send the central bank into outer space as promised in the election? So far, it’s impossible to gauge whether Milei has been persuaded that this may turn out to be mission impossible or whether he is biding his time. Most Argentinians already hold most of their holdings – if they can – in dollars. And most of their debt – which is international – is priced in dollars. 

Yet it’s not an impossible feat to achieve. Panama, Ecuador and El Salvador have all switched to the dollar, although of course, they are much smaller countries than Argentina. And they achieved this in different ways. Ecuador switched the sucre over a period of nine months while El Salvador phased out the coronas over two years. 

So far, since taking office, neither Milei nor Caputo have mentioned getting rid of the peso or indeed abolishing the central bank in its entirety. Is that because the new president realises that it’s easy to campaign on bold reforms but not so easy to deliver? Has Milei already given in to the establishment or is he being careful? Again, it’s too early to say. But it’s clear that he knows he must confront Argentina’s fragmented parliamentary parties – and the country’s system of powerful regional governors – if he is to achieve change.

His political party, Libertad Avanza, which he only founded two years ago, is driving a coalition of small right-wing and libertarian parties that have minority representation in Congress. His party holds just 15 per cent of seats in the lower house and only 10 per cent of the Senate. So he is all too aware that the only way to push through his reform is with the support of other parties, both centrist and Peronist. At this early stage of his honeymoon in power, it’s only fair to give Milei some credit that he is being careful, biding his time. 

What’s more, he knows that dollarisng the Argentinian economy is a costly affair: if done immediately, it would require Argentina to exchange all pesos held by residents and businesses for dollars – and agree a dollar value for all assets and contracts. 

Economists reckon this could cost around $35 billion – money Argentina doesn’t have. They are as in the dark about Milei’s next step as the rest of us but they don’t read too much into his silence on dollarisation over the last few weeks. Well, not yet. Economist Nicolas Cachanosky of the University of Texas El Paso points out that the dollar is already de facto Argentina’s main currency but not de jure, a move that will require a huge legal shift in status. Guido Agostinelli, an economist at the University of Buenos Aires, suggests that rather than abolishing the central bank, Milei will seek to reduce its power in printing money. Abolition, he reckons, is too big a move at this stage. 

And Milei must know this. Despite all the bravado and talk of chainsaws, the Tommy Cooper haircuts, his love of dogs and rock music, Milei is a smart and serious economist and thinker, quoting Hayek and Milton Friedman. More pertinently, he prefers to promote ideas rather than himself. His interview with Tucker Carlson, where he says, “I’m not here to lead sheep, I’m here to wake up lions” is worth watching in full.  

His inaugural speech as president was equally clear: “I want you to be aware that we are going to begin the reconstruction of Argentina after more than a hundred years of decline, redrawing the ideas of freedom, although we are going to have to endure a period of hardness, we will move forward.” Who knows what Milei will be brave enough to do over the next few months? But if he is brave enough to push through even some of his wildest promises, he will be remembered as a boluda in the original sense of the word and not a fool as it is used in slang.  

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