Javier Milei was elected President of Argentina. This is a mandate that profound changes should be made for this country, which has been experiencing a prolonged economic and financial crisis for decades. The problems are deep, the challenges are significant, and the visibility is reduced. We stay away. A disaster economy.
Once one of the world’s powers and a member of the G20, Argentina has experienced a marked decline for several decades.
At its origin, there is a terrible financial situation, the result of the will of successive governments to spend more and more despite the lack of means to do so. Several times, victims of the excesses of the authorities of Buenos Aires and defaults of the country, investors are reluctant to finance it.
Therefore, access to debt markets is limited.
For just over six decades, Argentina has had to sit down with the International Monetary Fund more than 20 times to set up loans and credit lines of all kinds. It is by far the largest customer of the IMF. This inability to manage public finances has been devastating to the economy.
In 1992, Argentina had a fresh start, with the value of the new peso set at parity with the US dollar. This level was kept until 2002 at the price of artifices such as the corralito (the limitation of bank withdrawals) and the corralón (the forced conversion of accounts in USD into accounts in peso at the official rate, unfavourable to the saver). But later, the value of the peso crumbled.
Today, the official USD is around 350 pesos. The blue dollar, a harmless exchange rate closer to the real value of this currency that nobody wants, trades around 1060 for 1 USD, three times more expensive. This boosts inflation, which currently exceeds 140%. At this level, it destroys the purchasing power of households, makes it extremely difficult to invest (the key interest rate is 133%), and burdens the economy. In the second quarter, Argentina’s GDP fell by 4.9% compared to the same period in 2022.
Dollarisation and reforms on the agenda
The fall of the peso is the symbol of the failure of Argentine financial policy. It is therefore not surprising that one of the main priorities of Javier Milei, who intends to break with the past, is the dollarisation of the economy and the abolition of the Argentine central bank, which is instrumentalised by power and not credible.
He also wants to reduce public spending by 15%: to do so, he will minimise federal government transfers to the provinces of the country, direct subsidies to households to those who need them most, and privatise public works, as well as public enterprises (media, air transport, energy, etc.).
It is an ambitious programme whose implementation will not be noticeable. The Argentine Congress will be mainly hostile to Milei. Only about half of the members of the House will be elected. In the Senate, they will be only 1/3. The new president is, therefore, condemned to a cohabitation that promises to be complicated. To his program, little consensus is added to his style, which is even less.
This risks undermining its ability to find the majorities necessary to carry out the fundamental reforms it aspires to. To this is added that, in a country where 40% of the population lives below the poverty line, the reduction of transfers to the provinces and the reorientation of state subsidies is likely to hurt very much, especially at a time when purchasing power plummets and growth collapses.
The suspense remains regarding President Milei’s ability to implement the promised reforms. Visibility into Argentina’s future is limited, but one thing is sure: Milei will have a narrow window of opportunity to make a difference.
Dollarisation: the panacea?
Will dollarisation magically solve the country’s problems, as Milei thinks? One can reasonably doubt it. The country offers a reduced currency risk and an otherwise cheaper credit by opting for dollarisation.
The industrial sector, some of which is at a standstill due to lack of the necessary dollars to import components it needs to turn, would also be at the party. Equally important, dollarisation would prevent the Argentine Central Bank from printing money to allow the state to spend recklessly, as has been the case in the past.
Dollarisation, therefore, promises increased credibility and is a brake against the excesses of the past.
But there are many questions. One is the ability of the country to do that. About USD 9 billion would be needed to make this transition. Argentina, whose principal foreign exchange reserves are made up of capital borrowed from China and which borrowed from Qatar this summer to be able to repay the IMF, will find it difficult.
We will then have to see at what exchange rate the transition will occur. At its official exchange rate, the peso would be vastly overvalued against the US dollar and dampen the economy for years.
More generally, it should be added that by doing so, Argentina is outsourcing its monetary policy to the US Federal Reserve and depriving itself of the instruments that enable it to guide and adjust its economy.
Between 1992 and 2002, when the peso-US dollar parity was maintained, Argentina’s currency appreciated against its neighbours and trading partners. This has resulted in a sharp loss of competitiveness in the industrial sector - much less competitive than the agricultural sector - and in the Argentine economy.
With dollarisation, Argentina risks feeling déjà vu if its productivity does not take off.
Exasperated by an economic, financial and social situation deteriorating for decades, Argentinians felt they had little to lose and opted for change. Given the radical programme, there is no doubt that events in the country will be followed closely elsewhere. A success for Javier Milei would give others wings in Latin America and elsewhere. On the other hand, failure would push them to rethink their strategy.
The case of Argentina and its decline that has lasted for more than half a century is, in any case, rich in lessons, especially for Europe. It shows that an economy, as prosperous as it is, cannot afford to sacrifice, one after the other, its competitive advantages without offering itself new sectors of excellence, that the prosperity of society depends on the wealth created and the management that is made of it, but also that indebtedness is not a solution to fundamental problems since, in the long term, a country can't live beyond its means.
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