Have the first six months of Milei improved the Argentine economy?


President Milei held a chainsaw last year

Has President Milei kept his promise to cut government spending? (Getty Images)

When Javier Milei campaigned to become president of Argentina last year, he brandished a chainsaw to symbolize his determination to make substantial cuts in government spending.

Now that he has been president for six months, how is his shock therapy working for both the government and the economy?

“The changes our country needs are drastic,” Milei said shortly after his election. “There is no room for gradualism.”

And he certainly took swift action. In his first package of measures, he devalued Argentina’s currency, the peso, by 50%, cut state fuel subsidies and halved the number of ministries.

The rapid reduction in government spending has helped Argentina overcome a budget deficit – the difference between government expenditure and revenue 2 trillion pesos ($120 billion; £93 billion) in December last year to a surplus of 264.9 billion pesos in April.

Argentina also reported a surplus in January, February and March, marking the first time it reached this monthly target since 2012.

However, Mr Milei, who describes himself as a libertarian, has made reducing inflation his main priority, telling the BBC last year that it is “the most regressive tax that affects people the most”.

Inflation has slowed: in April, month-on-month interest rates fell to 8.8%, the first time since October that they were not in double digits. This inflation measure is closely monitored in countries like Argentina, which have long had high inflation.

But when it comes to the more globally recognized annual inflation rate, it was 289.4% in April. To put that into perspective, in Britain the annual rate is currently just 2.3%.

And while official growth figures are not yet available for the period since Mr Milei took power on December 10, there are indications that Argentina’s economy has contracted sharply, with consumer spending falling in the first three months of this year.

A man with peso billsA man with peso bills

The Argentine peso was devalued by 50% by the new government (Getty Images)

Meanwhile, other promises Mr. Milei made during his campaign, such as replacing the peso with the U.S. dollar and abolishing the central bank, have taken a back seat recently.

The problem for President Milei is that his La Libertad Avanza coalition (in English: Freedom Advances) does not have a majority in the Argentine Congress. And it has struggled to reach agreements between parties.

Mr. Milei wants Congress to give him the power to privatize more than 20 state-owned companies, including the state-owned airline, the railways, the postal service and the national water supplier.

His original “omnibus” bill, which contained the privatization plans and hundreds of other economic measures, failed to pass a second reading in February. A streamlined version, resubmitted to Congress in April, received approval from the House of Representatives but must still be approved by the Senate.

The president also faces strong opposition from unions, who have taken to the streets in protest, saying workers’ rights will suffer from the wholesale deregulation of the economy.

Juan Cruz Díaz, managing director of Argentina-based geopolitical risk consultancy Cefeidas Group, says Milei’s economic policies during his term are as radical as promised during the campaign, just with some delay.

“His government has been forced to delay these reforms given the political and social obstacles it has faced,” Mr Díaz said.

He added that specific factors causing the president to proceed cautiously include “the deterioration of people’s purchasing power and the fear of increasing social unrest.”

This is because the number of people living in poverty has not decreased: from about a quarter of the population in 2017 to more than half now.

However, the International Monetary Fund, which has lent more money to Argentina than to any other country in recent decades, gave the government high marks in May, saying its performance was “better than expected” and that its economic program was “solidly behind the back was’. on course”.

On whether President Milei can get more policies agreed upon by parliament, Mr Díaz says that while some sectors of the opposition are open to dialogue with the government, left-wing parties are completely against his agenda. These include the Peronist faction controlled by ex-president Cristina Fernández de Kirchner.

“In this context, the government’s ability to negotiate and reach consensus is tested daily, a test that Milei himself often hinders with certain outbursts and unnecessary confrontational statements,” Díaz said.

Many Argentinians see Mr. Milei’s exuberant personality as a hindrance rather than a help.

The latest survey from political consultancy Zuban Córdoba showed that 54% of respondents thought the president paid more attention to his international political image than to solving Argentina’s problems.

That perception has undoubtedly been reinforced by Argentina’s current diplomatic row with Spain, which has led to Madrid recalling its ambassador to Buenos Aires.

Kimberley SperrfechterKimberley Sperrfechter

Kimberley Sperrfechter of Capital Economics says Argentina needs to balance its books (Capital Economics)

Kimberley Sperrfechter, emerging markets economist at research group Capital Economics, says the central problem for President Milei is overcoming “years and years of economic mismanagement” in Argentina.

“One important factor is that the government has been spending far beyond its means (for decades),” she says. “And that deficit has been financed by the central bank printing money to finance government spending.”

This printing has contributed to the country’s rising inflation.

Argentina, the eighth largest country in the world, has in fact been in decline for more than a century. Its demise serves as a cautionary tale of how a nation’s wealth can be squandered.

Before the First World War, the country was among the ten richest countries in the world.

But a subsequent slow economic contraction was significantly accelerated by the populist policies – and overspending – of President Juan Perón, who was in power from 1946 to 1955.

There were some short-lived free market reforms in the 1990s under President Carlos Menem, who privatized many of the companies that Perón had nationalized and made serious efforts to restore confidence in Argentina’s currency.

But things took a sharp turn in late 2001, when the country faced a catastrophic economic crisis and a massive debt burden of $102 billion (£80 billion).

Argentina had effectively locked itself into a currency regime that offered it no flexibility, by fixing the peso at parity with the dollar. That, combined with the government’s usual overspending, had left it exposed to the ups and downs of the US economy, leaving it powerless when a run on Argentina’s banks ensued in 2001.

In the two decades since that crisis, the country was largely governed by left-wing protectionists, who essentially muddled through without addressing Argentina’s deep-seated problems.

Now that a right-wing libertarian government is in power, the country is trying to chart a new course – and that means putting public finances on a sound footing.

To help President Milei’s government achieve this, research firm Consensus Economics says the government is focusing on Argentina’s huge agricultural exports of grain, soy, meat and wine.

“Policymakers are pinning their hopes on agricultural exports that bring in much-needed foreign exchange as they hope to rebuild the central bank’s depleted foreign exchange reserves and in turn boost the state’s financial credibility,” Consensus said.

Javier Milei in Cordoba, Argentina, May 25, 2024 Javier Milei in Cordoba, Argentina, May 25, 2024

President Milei’s plans are hampered by his lack of a majority in Congress (Reuters)

Yet Sperrfechter believes that the Argentine economy is currently at a “tipping point” and that Milei, despite his election victory, cannot count on public support.

“It’s not that people were convinced of his policies, it was more of a protest vote,” she says. “Things couldn’t continue as they were.”

Ms Sperrfechter believes that despite the peso’s devaluation, the currency is still overvalued, possibly by as much as 30%. The exchange rate is still managed, rather than being completely free to rise or fall, she says, and this slows growth and damages competitiveness.

“With Argentina you never really know, but I think the shine is wearing off,” says Ms Sperrfechter. “Optimism will fade and the economy will struggle.”

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