Javier Milei's Libertarian Experiment: Mid-Year State of Economic Affairs
24Hour Journal's very own, Jonathan, reporting from Argentina on the current state of economic affairs for residents and foreigners.
Highlights
Economic Reforms: Milei's spending cuts and peso devaluation created a fiscal surplus but led to recession.
Investor Incentives: New laws offer tax breaks and eased exchange controls to attract investment.
Daily Impact: Unemployment and poverty are rising, with public patience wearing thin.
Upon taking office in December, Javier Milei inherited a state that had spent beyond its means for years, printing money to finance the fiscal deficit, fueling inflation. Inflation was soaring, foreign reserves were empty, and another default seemed almost inevitable. Mr. Milei rose to power by blaming the “caste,” Argentina’s political establishment and unions, for the mess. In his first address as president, he warned Argentines of hard times, declaring that “there is no money.” He immediately fired hundreds of bureaucrats, cut spending, and devalued the Argentinian Peso by over 50% (which initially pushed up inflation). Meanwhile, public salaries and pensions were held down, therefore cutting their real value.
As a result, Argentina has run a fiscal surplus for five months, an extremely rare occurrence in a country accustomed to a deficit and not seen since 2008. With the money printer unplugged, inflation is expected to have fallen to the (still-high) rate of 4% per month in June. Markets rejoiced at the cost of a deep recession.
Javier Milei is also setting the course through longer-term reforms, reflected in legislation and approved by Congress. After a torturous, months-long battle, his second attempt at passing a mega-bill was approved with modifications.
It is Mr Milei's first real legislative victory, despite fierce opposition on the streets. Markets celebrated, and the IMF, which extended huge loans to Argentina, was delighted.
Some of the measures approved include generous tax breaks for investors who invest more than $200 million, as well as exemption from most of Argentina's cumbersome foreign exchange controls for the next 30 years. The law also greatly increases Mr Milei's influence, giving him emergency powers over administrative, economic, financial and energy matters for one year. A tax amnesty was implemented to lure money back into the formal financial system, and private investors will be allowed to buy shares in some state-owned companies.
It's not all roses for the liberal dream
GDP forecast for 2024 is -2.8%, followed by a 6% rebound in 2025 driven by investment and private consumption. However, this outlook might be too optimistic for its good. The government hopes the recently passed bill will lure investors and boost growth.
Nevertheless, much of the overall macroeconomic mess persists, mainly due to Argentina's remaining strong capital controls, which make it difficult for investors to get money out of the country and for companies to repay debt to their parent companies abroad. Most gravely, the government remains unclear about its long-term plan for monetary policy and the exchange rate. Without good answers to these questions and precise action, Milei's hopes for a strong recovery remains a distant prospect.
How does this restructuring of the economy affect people's daily lives?
The more significant challenges of this government, however, are macroeconomic. The new Argentinian government has prioritized fighting inflation, but Argentines are becoming worried about unemployment and will eventually demand growth.
Complicating the recovery is the overvalued Argentinian Peso, which makes the country unjustifiably expensive in dollar terms. The government currently sets the official exchange rate and imposes stringent capital controls. But monthly inflation has been greater than the crawling peg, so the real effective exchange rate is rising.
An overpriced Peso scares off tourists, makes exports less competitive, and deters investors. An overvalued currency often eventually crashes, warn some economic consultants close to the government. Falling exports make it difficult for the central bank to accumulate dollars, which it needs to repay off foreign debt and increase its foreign exchange reserves.
But what does an overvalued peso mean in a country that is used to constant devaluation and inflation?
When you measure the average Argentinian salary in dollars, it is worth more now than in December 2023 when Mr Milei took office. However, due to the high inflation (292% year-on-year peak in April 2024) and price deregulation in energy and fuels, this situation does not translate into an improvement in the Argentine people's pockets. The main measurements that follow the level of industrial production, construction, and domestic market are in free fall, even with values similar to those of the pandemic in 2020. Unemployment is growing, and at least 35% of workers earn wages below the poverty line. For the common worker, the scenario is not reassuring, and the government knows that voters' patience is not unlimited.
And how does this translate for a freelance worker?
First of all, the labor market is very quiet. With few exceptions, hiring has been paused while waiting for the dust to settle and the economic outlook to ameliorate. For freelancers with clients abroad earning salaries in hard currency, the cost of living, measured in dollars, has increased by about 50% since December 2023. This translates into higher labor costs and a loss of competitiveness that not all freelancers can pass on to their employers.
The retail economy does not seem to find a floor for the ordinary worker. The prices of food, household appliances, and vehicles increased in constant currency, wages are lagging behind inflation.
While Javier Milei's economic team adjusts the macroeconomic variables and the indicators begin to reflect the surplus, the situation on the streets shows a marked contrast: empty stores and restaurants, industries slowing down their production, and a marked reduction of spending in retail businesses.
Despite Javier Milei's extravagances and self-perceived madman image, partial results indicate that Argentina's libertarian experiment is on the right track.
Yet, voters' patience will not last forever, and the social situation may become unsustainable if there is no real improvement in people's daily lives.
Mr. Milei has so far done a remarkable job of undoing the fiscal drag that has been weighing Argentina down and disarming (in part) the ticking time bomb he received from the previous administration. But if he is wrong on the big macroeconomic issues, that will count for little.
