Economy

Can Milei defuse Argentina’s economic time bomb?

2 Mins read

By Hernan Nessi

BUENOS AIRES (Reuters) – Argentina’s libertarian president, Javier Milei, a political outsider who won election last year brandishing a chainsaw as a blunt symbol of his plans to cut spending, is defying long odds to right the embattled economy and keeping a lid on voter anger.

After years of economic crises, debt defaults, soaring inflation and currency crashes, Milei’s success is giving an adrenaline shot to long-moribund local bonds and sparking a wild rally in the markets some 11 months into his administration.

The wild-haired economist, a poster child for the global far right and neoliberalism, has scored key economic wins in recent months, helping pull the country’s debt out of distressed territory for the first time in half a decade.

His government, packed with more moderate conservatives, has tamped down triple-digit inflation, rebuilt central bank reserves, strengthened a beleaguered peso currency, overturned a deep fiscal deficit, and lured dollars back to the banks.

And while a tough cost-cutting austerity drive has pushed up poverty and hurt economic growth, Milei’s theatrical and straight-talking style – while not for everyone – has kept many voters on his side and propped up his ratings in opinion polls.

Despite the painful austerity, his government has made sure to ring-fence and even boost spending on specific welfare programs that have so far helped head off fiery protests in the streets, even with poverty levels that have risen over 50%.

The economy remains a potential tinder box, but Milei’s success to date has convinced markets. The S&P Merval stock index is at record highs, while bonds have soared this year from around 20 cents on the dollar to some now nearing 70 cents.

So what has Milei done and how has he convinced Argentina to swallow a painful dose of austerity?

ZERO FISCAL DEFICIT

Milei’s government has managed to do something few thought was possible without sparking riots in the South American country: cutting public spending by billions of dollars and posting regular fiscal surpluses after years of deficits.

RESERVE BUILD-UP

The central bank is on a drive to build up depleted foreign currency reserves, which were deep in the red when the government took over in December. The central bank has added a net $19 billion this year, with FX purchases gaining speed in recent weeks after a mid-year lull.

INFLATION COOLING

Argentina’s annual inflation, at over 200%, remains the highest in the world. But monthly price rises have slowed sharply from 25% in December to around 3.5% now, helping bring interest rates down, with the latest cut to 35% on Friday.

DOLLARS RUSH BACK IN

With greater bullishness by investors in the country and a program to give amnesty to savers, the government has lured almost $20 billion of dollar deposits back to local banks.

CURRENCY GAP NARROWS

A tough focus on stopping money-printing, cutting spending with the painful austerity drive and rebuilding reserves has lowered demand for dollars – and increased demand for pesos – boosting the local currency in popular parallel markets

That has led the gap between the official and parallel exchange rates to narrow significantly. A wide gap in recent years, which ballooned to almost 200%, badly distorted the grains-producing country’s economy and complicated trade.

POPULARITY CONTEST

Argentines are sharply divided about Milei, who is proudly anti-feminist and a climate-change skeptic. However, opinion polls show he has generally kept his support, despite cuts to spending and people having to tighten their belts.

This popular backing is key to his reform plans with his party having only a small number of seats in Congress.

This post appeared first on investing.com

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