Published on January 23, 2024

President Milei and Argentina’s Economic Crisis

Persistently high inflation, massive fiscal deficits, multiple currency devaluations, corruption, and political instability. Despite being rich in natural resources, Argentina has successfully handled its its many economic challenges. Amidst these crises, Argentinians elected a firebrand political newcomer and markets have applauded the unorthodox new president. Who is Javier Milei and can he save Argentina?

Argentina’s Economic Crisis

Corruption and mismanagement have led Argentina to its worst economic crisis in decades. After multiple defaults of sovereign debt in just the last two decades — there is a growing probability that the country is at a high risk of defaulting again within the next five years.

Probability of Default of Selected Latin American Countries

Argentina Economic Crisis: Latin Countries Default

Source: Simauchi, K., & Squires, S. (2023, October 21). Bloomberg, October 21, 2023. “There’s no Easy Way out of Argentina’s Endless Crisis.”

Inflation

One of the main causes of Argentina’s economic crisis has been perpetually high inflation. In November, inflation catapulted to 12.8% from 8.3% in the prior month and was above forecasts of 11.8%, with prices elevated across various expenditure categories. November’s spike added to the economic challenges in Argentina, as consumer prices surged by 160.9% year over year in November, the most since June 1991.1

To combat inflation, in October the Central Bank of Argentina (BRCA) raised the key Leliq interest rate to 133%, while no change was made at the December meeting. But even with the Leliq interest rate at its highest level since the early 1990s, inflation has yet to cool.2

Argentina’s Leliq Interest Rate

Argentina Economic Crisis: Argentina’s Leliq Interest Rate

Source: Argentina 28-day leliq rate.

Contracting GDP

During the third quarter, Argentina’s gross domestic product expanded by 2.7%. However, the economy is still shrinking on a yearly basis. On an annual basis, GDP contracted by 0.8%, after falling 4.9% year over year in the second quarter. The year-on-year fall was largely due to the historic drought that continued to impact grain production. For the full year, Argentina’s economy is set to contract by 1.4%.3

Depletion of Reserves

Agriculture is a key component of Argentina, comprising between 6-7% of GDP.4 The country is the world’s largest exporter of processed soy and a top exporter of corn. Still, this year’s drought, considered the worst in over sixty years, has critically hurt foreign currency reserves.

Argentina Foreign Currency Reserves

Argentina Economic Crisis: Argentina Foreign Currency Reserves

Source: Argentina Foreign Exchange reserves. Argentina Foreign Exchange Reserves, 1956 – 2023 | CEIC Data.

In debt to the IMF

Adding to its economic challenges, Argentina is the biggest borrower from the International Monetary Fund. In fact, the IMF approved an additional $7.5 billion installment for the country in August, even though Argentina had not met economic targets set forth.5

The use of the IMF funds by prior administrations has been questioned. Following the August distribution, former Chief of the Cabinet of Ministers Sergio Massa increased welfare payments and public salaries and slashed income taxes in a bid to win votes. (Massa was running against Milei but lost.) In a rare public rebuke, the IMF commented on the spending, with IMF chief spokesperson Julie Kozacks saying, “The economic situation remains very challenging and complex. Inflation is very high and reserves are extremely low. And this, of course, occurs in the context of very fragile social conditions,”6

The IMF’s Largest Debtors

Argentina Economic Crisis: The IMF’s Largest Debtors

Source: Martin, E., Tobias, M., & Gillespie, P. (2023, October 6). Bloomberg, October 6, 2023. “The IMF’s $43 billion Argentina problem is about to get worse“

Argentina’s Currency Markets and the Rise of El Loco

Argentina’s economic crisis has been further exacerbated by the expansion of its money supply. Former President Alberto Fernández took office in December 2019, and a recent report stated that his government printed monetary bills equivalent to 18% of GDP during his term.7

In response to Argentina’s monetary policy, a parallel currency market has emerged. Referred to as the "blue dollar" or "parallel exchange rate," the parallel markets have emerged due to the many currency controls the government has put in place.

Not long ago, Javier Milei was mainly known as a television talking head. Milei ran for president of Argentina as part of “La Libertad Avanza — Liberty Advances” and is a relative newcomer to the political landscape. A trained economist, the libertarian was elected to Congress in 2021 for Libertad Avanza and was voted in as Argentina’s president in early November in a landslide vote.

Sometimes referred to as “El Loco” — the crazy one — Milei captivated Argentines with his on-screen antics (that included chainsaws), disheveled appearance, and pledges to radically fix Argentina’s woes.

Milei’s Shock Therapy

"There's no money. There's no money,” emphasized Milei when he spoke to a local outlet after his election win. "If we don't make a fiscal adjustment, we're headed for hyperinflation. We'll have hyperinflation and we are going to have 95% poverty and 70% or 80% homeless."8

Among the many proposals that Milei laid out during the election, the most dramatic was the elimination of Argentina’s central bank and to dollarize the economy, replacing the Argentine peso with the U.S. dollar.

After being in office for just a few days, Milei had already started his “shock” therapy by devaluing the peso by 50%, which dropped the peso’s value from 366 to the dollar to more than 800 to the dollar.9

Milei also plans to cut new public works projects, reduce energy and transportation subsidies, and not renew labor contracts in effect for less than one year. Response from policyholders has been positive, with the IMF stating it supports the new government’s measures.

Efforts to dollarize the economy, however, may not be simple. While other countries, including Panama, Ecuador and El Salvador, have adopted the U.S. dollar as legal tender, their economies are much smaller than Argentina’s. But in the short time Milei has been in office, he has already met with top U.S. officials, and his economic team has worked with the IMF to modify the country’s foreign policy and revitalize its economy.9

Markets have overwhelmingly responded to Milei, with the Merval hitting an all-time high and Aregentina’s bond markets also climbing.10

Aspiring to be Trump, Bolsonaro or Doi Moi?

Comparisons have been made between Milei and former U.S. president Donald Trump. Both are abrasive, political outsiders with a lot of hair. Milei has also been compared to Brazil’s former president, Jair Bolsonaro. The parallels for Milei, Trump and Bolsoanro derive from their anti-establishment views and campaign strategies.

However, there are more differences than similarities. As an economist, Milei "lives and breathes the economy”11, and, unlike Trump, who increased the U.S. national deficit, Milei is looking to cut public spending. Further, Bolsonaro, who failed to win a second term, failed to make any significant economic changes.

A more apt comparison point may exist between Milei’s economic policies and Vietnam’s. Vietnam is an instance of a country that successfully underwent an economic transformation — except it wasn’t with a populist politician.

Vietnam was still recovering from years of war in the 1980s when a set of economic reforms labeled Doi Moi, after the General Secretary of the Communist Party of Vietnam, transformed the country and introduced market-oriented policies to stimulate economic growth and development. Poverty in the country dropped from nearly 60% in 1993 to 14% in 2014.

Doi Moi included measures such as the opening up of the economy to foreign investment, privatization of state-owned enterprises, agricultural land reforms, and the encouragement of private entrepreneurship. These reforms led to significant economic growth and development in Vietnam, transforming the country into one of the fastest-growing economies in the region.12

Is There a Way Out of Argentina’s Economic Crisis?

Can Milei solve Argentina’s economic crisis? The country has a number of natural resources and potential for further development, including:13

  • Second-largest shale gas and fourth-largest shale oil reserves in the world
  • Third-largest proven lithium reserve, with over 70% yet to be exploited
  • A leading nuclear power in South America with three nuclear power plants

Another of Milei’s bold moves was to rescind Argentina’s acceptance to join BRICS (Brazil, Russia, India, China, South Africa) — the platform of emerging market countries established to challenge developed market order. While former President Alberto Fernández celebrated the invitation, Milei wants to disrupt Argentina’s foreign policy with two of its largest trading partners, Brazil and China, and turned down the invitation.14

His antics have sparked comparisons to other TV personalities turned politicians, but while Milei may be a newbie to politics, he’s no stranger to economics. He not only holds two master's degrees in economics, but has also taught economics at the university level. Milei was the people’s choice, but only time will tell if he is the right person to fix Argentina’s economic crisis.

Sources:

  1. INDEC, I. N. de E. y C. de la R. A. (n.d.). Instituto Nacional de Estadística Y censos de la república argentina.
  2. Argentina 28-day leliq rate. (n.d.).
  3. Lopez, J. 2022, January 25. Argentina enters recession with runaway inflation as Milei starts shock therapy. ICIS Explore.
  4. Villa, P. N. 2023, December 12, Statista. Agricultural sector’s share of GDP in Argentina 2022.
  5. IMF, 2023, August 23. IMF Executive Board completes the combined fifth and sixth reviews of the extended arrangement under the Extended Fund Facility for Argentina.
  6. Gillespie, P., Martin, E., & Tobias, M.Bloomberg, 2023, September 28.“Argentina spending boom led by Massa adds risks to $44b IMF deal.”
  7. Buenos Aires Times, Grainger, J, 2023, September 21. Government has printed equivalent of 18% of GDP since 2019.
  8. Argentina’s Milei doubles down on economic shock ... (n.d.).
  9. CNN business, Hur, K., 2023, December 13. Argentina to devalue peso by over 50% as part of emergency economic reforms
  10. Argentina Stock Market (MERVAL) - Quote - Chart - Historical Data - News. (n.d.).
  11. FT.com, Stott, Michael, Nugent, Ciara, Nov. 26, 2023. “How similar is Argentina’s Javier Milei to Donald Trump and Jair Bolsonaro?”
  12. International Monetary Fund. August 2018. Working Together: Vietnam and the IMF.
  13. November 2, 2023, International Trade Administration. Argentina - market overview.
  14. POLITICO, Starcevic, S. 2023, December 1. Argentina snubs BRICS invitation.

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