In Argentina, Javier Milei faces a massive economic crisis
To an American audience, Argentina’s election may seem uncannily familiar. A political outsider with bouffant hair and a history of outrageous remarks promises to make the country “great again”, and is written off by the liberal elite before winning the presidential poll with a large backing of the population, many of whom feel left behind. Yet the election, on November 19th, of Javier Milei, a self-described “anarcho-capitalist”, is not a repeat of Donald Trump’s playbook in the pampas. Mr Milei faces a far trickier economic situation than any American president in recent years. Many voted for him not because of his inflammatory rhetoric—but in spite of it, in an act of desperation.
Argentina is in a terrible state. Annual inflation is currently over 140% and is expected to reach 200% by early next year. That is up from 54% when Alberto Fernández, the outgoing Peronist president, took office in 2019. Four in ten Argentines live in poverty. In the weeks ahead of the election Sergio Massa, the economy minister and Mr Milei’s opponent, ramped up a populist splurge in handouts, equivalent to around 1% of GDP.
The country is dead broke. Public debt to gdp is 90%; and the fiscal deficit, when measured properly to include central-bank money printing, is about 10% of gdp. Its dollar bonds trade at less than 33% of their par value. External sources of cash are tapped out: the country already owes the imf $44bn and its foreign-exchange reserves are about $10bn in the red on a net basis (after deducting central bank swap lines and other liabilities). There are at least 15 different exchange rates, including a special one for the exports of soya. While the headline official wholesale exchange rate is 354 pesos per dollar, on the black market the currency trades at nearer 900.
To face Argentina’s demons, Mr Milei’s government will have to take a trio of emergency economic measures. First, rapid belt-tightening to bring the fiscal deficit down: unaffordable pensions and fuel subsidies are an obvious area to target. Second, liberalisation of the exchange-rate system even though this will lead to a devaluation and spur inflation. This is inevitable: Argentina no longer has the dollars it needs to defend the official rates. And lastly the country needs to restructure its debts to lower them to sustainable levels. This will probably require the imf to admit to losses, or to charge artificially low interest rates on the $44bn of loans it extended to Argentina, which represent one of the biggest mistakes in the fund’s history.
What about dollarisation, Mr Milei’s highest-profile policy? When a country’s financial credibility is in shreds adopting the greenback in place of its domestic currency may make sense. Eight countries other than the United States use the dollar as legal tender including Ecuador and Panama. Nonetheless to do this in an orderly manner requires enough time for the elaborate preparations required and a large initial float of dollars with which to back the banking system. Argentina lacks both.
Indeed the trio of emergency economic measures are themselves a giant leap. Mr Milei, who campaigned wielding a chainsaw in order to symbolise his approach to cutting down the state, may have won with a large mandate. But he will hold a fragile position in government: his coalition, Liberty Advances, will have only 38 of 257 seats in the lower house of Congress and seven of 72 seats in the Senate. This means that he will have to build alliances, particularly with Republican Proposal, a centre-right party led by Patricia Bullrich, a moderate right-winger who was eliminated in the first round of the election in October.
In order to create such alliances Mr Milei needs to become more statesman-like after a lifetime of eccentricity. Until now he has relied on divisive figures and cranks for advice. His running-mate, Victoria Villarruel, has downplayed the atrocities of Argentina’s military junta, which ruled the country from 1976 to 1983. His potential foreign minister has compared same-sex marriage to having lice. Mr Milei has not said who will be economy minister—suggesting that he may take on the job himself. Instead he must surround himself with mainstream politicians who can help him build a coalition in Congress and maintain public support for painful reforms. He should appoint Ms Bullrich and Mauricio Macri, a former president, to his cabinet.
Mr Milei’s time in power will not be easy. Mr Macri was the first non-Peronist to complete his term in office since the restoration of democracy in 1983. And despite Mr Macri’s best efforts to introduce centre-right reforms during that period, his stint ended with the country on the brink of default. Mr Milei needs to act quickly, but also to build a national consensus about economic reform in order to ensure that his policies do not result in Argentines taking to the streets. So far his lack of experience and volatile character do not suggest that he can manage this. If Argentina has become an economic casino, he is the last roll of the dice. ■