Argentina’s New President – First 60 days in Office
If someone only read headlines over the last few years, it would be easy to associate Argentina with “debt defaults” and “inflation”. What many forget is that Argentina was once an economic powerhouse. In the so called, “golden age which lasted from the last 1870 to 1930, Argentina experienced significant economic growth and became one of the world’s richest nations on a per capita basis.
During this period, Argentina was able to grow due to an agricultural boom, making the country a major exporter of beef, wheat, and other agricultural products. Investment poured in from European countries, which led to a significant wave of immigrants from Italy and Spain, urban development, investments in education, and culture renaissance. If you visit Buenos Aires today, you still see many of these achievements from this period, particularly the architecture, boulevards, and museums.
Today, Argentina and its 46 million citizens still have many of the special traits that made it special during its golden age. Argentina has a diverse economy that includes agriculture, manufacturing, services, and technology. The country has abundant natural resources, including oil, gas, copper, and lithium. All these sectors are supported by a well-educated work force.
Unfortunately, poor government policies and a host of other factors have led to currency devaluations, inflation, defaults on sovereign debt, and social unrest. Last year, the annual inflation rate hit 161% and the poverty rate rose to 40.1%. Elections were more important than ever, and citizens voted for an outsider, libertarian economist, Javier Milei.
Who is Javier Milei?
Javier Milei is an Argentine economist, author, and political commentator. He gained public attention for his outspoken views on economic and political issues in Argentina.
The self-confessed libertarian received media attention for his combative and wild style, promising to dramatically reduce the size of government, reducing public works, dollarizing the economy, and the promotion of free trade.
After a dramatic and interesting election campaign, Javier Milei came out as the winner in the presidential runoff taking 56% of the votes. It is the highest percentage that a presidential candidate has received since the South American country’s return to democracy in 1983.
First 60 days in Office
After winning the election, newly elected Javier Milei wasted no time announcing his austerity plan within weeks of taking his new role.
- Austerity Plan – Within days of being elected, the new president issued a sweeping emergency decree and ‘omnibus’ bill that deregulated the economy by reforming 300 laws that made changes to labor laws, the financial and banking systems, privatizations, healthcare, energy and natural resources, telecommunications, real estate, and contracts. Overall, the decree repeals dozens of laws, eliminates many price controls, and reduces state intervention. The opposition has accused Milei of using decrees to bypass congress where his collation only holds 15% of the seats. Under the Argentinean constitution, presidents can issue decrees on most areas of policy except in tax, penal, and electoral matters.
Devaluation of Peso – The new government immediately devalued the pesos in hopes of eventually bringing the country’s roaring inflation under control. The shock devaluation weakened the peso by 50%, where the official conversion rate in December increased to 800 pesos per dollar from 365 pesos. The immediate effect was a strong increase in inflation where prices sourced for everything from clothing, food, and plane tickets.
- Cuts in Public Spending – There were also announcements aimed at cutting public spending with which the government hopes to save the equivalent of almost three points of GDP: a freeze on public works, an increase in retirements ordered by decree, a reduction of subsidies for transportation and energy, fewer federal fund transfers to the provinces, and the cancellation of official advertising, among other measures.
What has been the reaction?
With fuel prices doubling, inflation soaring, and the value of the national currency plummeting, it should not shock anyone to hear that many Argentineans were not happy with the immediate changes that Milei made. With that being said, it was widely predicted that the situation would need to get worse before it could get better.
- Protests – Last week, approx. 40 thousand Argentines in Buenos Aires took to the streets which was described as one of the biggest demonstrations in recent years, Unions and civic groups joined the protests and airlines cancelled or delayed almost 300 flights. The one-day protest was mostly peaceful, and analysts believe it was to show the new government potentially what weight the unions could carry to the negotiation table.
- Labour Reforms Suspension – In January, judges suspended labour law changes that form part of the new presidents’ decrees. The injunction marks at least a temporary victory as the new government has appealed the ruling. However, although the court’s decision is a strong blow to the labour reform, most of the hundreds of changes and derogations imposed by the Government by decree are still in force.
- Approval from Congress – With the Presidents party a minority in Congress, the mega bill that was introduced is requiring Milei to negotiate and dilute the original bill to get it passed. As of this week, they have removed changes to taxes and pensions that were included in the original. The goal is to make passing the bill easier, but it also removes key reforms aimed at cutting spending and boosting state revenues.
Javier Milei wasted no time with introducing reforms, learning from past presidents who decided to take a more cautious approach to sweeping changes. The newly elected President knows that the deep cuts to spending and reforms to various sectors would make the economic situation tougher before eventually seeing improvements.
Whether Javier Milei is successful will depend on his ability to navigate a congress that his party holds a minority share of the seats. More importantly, it will require the support of Argentineans. The last serious attempt to reduce deficits was in 2001, which ended in protests, riots, and a circus of five presidents in two weeks.
The president has been clear: Life in Argentina will get a lot darker before there is light at the end of the tunnel. He intends to slash public spending to bring it in line with revenues and to cut key subsidies on which a swath of Argentines have come to depend, such as for utilities and public transit. Not an easy task.
For foreign companies looking at Argentina, particularly in the natural resource space, there could be upside if the reforms can be passed. Removing foreign exchange controls and guaranteeing investments will go a long way to push an interesting pipeline of copper and lithium projects to production.
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