Argentina’s next president, Miley, must rein in inflation and turn the economy around

BUENOS AIRES, Nov. 20 – Argentina’s libertarian president-elect Javier Mille has won a hotly contested election. Now comes the hard part: dealing with economic crises.

Inflation is at 143%, net foreign exchange reserves are in the red, savers are draining the peso, and recession is brewing – if not already. Four out of 10 people in Argentina live in poverty, and a sharp devaluation is likely.

Milei, who promises economic shock treatment such as closing the central bank and dollarization, won Sunday’s runoff with 56% of the vote to Sergio Massa’s 44%.

Miley now faces the huge challenge of turning around the economy when she takes office on December 10. Failure would mean the already-strapped country would default on a tenth of its sovereign debt, leading to rising poverty and potential social unrest.

“It’s an economy in intensive care,” said Miguel Giguel, a former undersecretary of finance at the Ministry of Economy in the 1990s.

inflammation

Argentina’s high inflation rate creates major distortions in markets and consumers, with prices fluctuating weekly. A central bank survey of analysts predicted inflation of 185% by the end of the year.

“One of the biggest challenges of the next administration is to correct the distortion of relative prices that the economy has today,” said economist Lucio Carrey Mendez of the EcoGo consulting firm.

“In the context of high inflation and a stabilization plan, a correction is inevitable.”

Argentina’s central bank has raised its benchmark interest rate to 133% in an effort to curb inflation, encouraging savings in pesos but hurting access to credit and economic growth.

PESO Restrictions

Argentina’s peso currency has been constrained by capital controls after a market crash in 2019 that led to an unruly range of exchange rates where the dollar is trading at more than double the official rate of close to 350 per dollar.

Popular unofficial exchange rates include the “blue” dollar, the MEP, and the blue-chip swap, although demand for dollars through parallel channels has spawned dozens of different rates over time, including the “coldplay dollar” and the “malbec dollar.”

Milei has pledged to quickly undo capital controls and eventually dollarize the economy, while a sharper devaluation is likely in the near future to bring official and parallel rates closer together.

Central bank reserves

Argentina’s central bank’s foreign currency reserves are at their lowest level since 2006 and are widely seen by analysts as being in negative territory on a net basis after a major drought affected exports of key cash crops such as soy, corn and wheat.

Low reserves threaten the country’s ability to repay loans to key creditor the International Monetary Fund (IMF) and private bondholders, as well as key imports. Argentina must restructure its $44 billion IMF program.

The government has agreed to extended currency swaps with China to cover some of its costs, and has had to delay some payments to key trading partners such as Brazil.

Depression

According to the latest central bank analyst survey, Latin America’s third-largest economy is on track to contract by 2% this year, hit by a recent drought that cut corn and soy crops in half.

With triple-digit inflation, it is likely to sharpen poverty levels, with two-fifths of the population already living below the poverty line as salaries and savings erode.

The silver linings?

Argentina, rich in grains, shale gas and lithium, could see a boost next year as good rains help harvests, a new gas pipeline reduces reliance on expensive imports, and rising demand for lithium needed for electric vehicle batteries.

Soy and corn are expected to have very strong harvests, bringing in much-needed foreign currency.

“The harvest will bring more income to the economy, as well as (shale oil development) Vaca Muerta will be more productive,” said Eugenio Marí, chief economist of the Libertad y Progreso Foundation.

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