Last night the Argentines elected a president who will barely have time to celebrate the victory. The time is serious, and he must quickly get to work to re-found an economy that is about to fall apart, is full of patches and held together by pins. Restitched from top to bottom, the emergency stitching has so far avoided a (another) large-caliber monetary crisis, but fears of disaster are not going to dissipate overnight.
Javier Milei, called by the polls to lead the Executive from December 10, will have the major challenge of applying a stabilization plan that, at the very least, reduces the deep macroeconomic imbalances in Argentina and improves expectations internally and in the face of the international economic institutions.
The starting point is very complex and will determine the viability and chances of success of any economic program that is applied, whatever it may be. “Whoever wins on November 19 will inherit a dire economic situation. The current policy mix has led to unsustainable macroeconomic imbalances,” explained Michael Heydt, senior vice president of global sovereign ratings at rating agency DBRS Morningstar.
Fiscal and monetary problems, very high inflation, lack of monetary reserves, high debt, stagnant activity and increasing poverty rates are the accounts of the rosary of problems that the next head of state will face.
Without oxygen to function, the second largest South American economy accumulated a contraction of 1.6% until August and the consensus of private consultants indicates that the GDP will fall by 2% this year from an expansion of 5% in 2022.
The main concern of Argentines is inflation, with a consumer price index that reached 142.7% year-on-year in October and which, according to private projections collected by the central bank, will accumulate an increase of 185% this year. highest since the hyperinflation of the 1989-1990 biennium.
Inflation fuels the demand for dollars for coverage in a market plagued by strong restrictions in the official market, by multiple parallel exchange rates and by recurring jumps in prices that feed back into inflationary inertia in the real economy.
At the root of this phenomenon are the fiscal and monetary imbalances in Argentina, which, without access to international markets and with a trade deficit, is financed with monetary issuance and placement of debt in the domestic market.
According to private calculations, the fiscal deficit accumulated until September is around the equivalent of 1.4% of GDP and the central bank’s real net reserves are negative, around -10.7 billion dollars. Without reservations, Argentina restricts imports – complicating local production – and has increasingly less power to appease an exchange market that suffers frequent tensions.
According to Heydt, “the lack of reserves and the large differential between the official and unofficial exchange rates suggest that a devaluation of the currency awaits the next Administration.”
“But a monetary tightening in the context of triple-digit inflation is a significant risk, because without a plan to anchor inflation expectations, more fuel will be added to the inflationary fire. Therefore, the next Administration will have to act quickly to implement a stabilization plan,” he states.
Milei promises to dollarize the economy, while Massa was betting on a better 2024 for the peso thanks to an export boom, but, even so, most experts discount an exchange rate correction.
In addition, the president will have to deal with the International Monetary Fund, an organization to which Argentina owes some 46 billion dollars and with which in 2022 it signed an agreement for extended facilities with demanding goals that are difficult to meet and which has not managed to chase away the ghost of a colossal default. In this scenario, Argentines will vote, who despite having an unemployment rate of 6.2% – the lowest since 2015 – earn salaries dented by inflation, which explains why, even with work, many make up that 40, 1% of the poor population.
