WSJ: Argentina’s President Pledged Fiscal Shock Therapy. So Far, He’s Delivering Economic Pain

Since Argentina’s self-styled anarcho-capitalist president, Javier Milei, launched economic shock therapy five months ago, retiree Angélica Galiazzi made a decision that shook her Argentine identity: She gave up eating beef.

In a country where eating homegrown steak is a way of life, beef had become too expensive on her monthly pension of $200 a month. So had taking the bus and even buying her blood pressure and cholesterol pills.

“I’m really stressed out,” said Galiazzi, 82 years old, who now buys cheaper slices of pork that she stretches out over a week of meals. “I barely have enough to eat with the pension.”

The free-market revolution that Milei promised when he took office in December is causing deep economic pain in Argentina. Nearly 60% of Argentines are now living in poverty, up from 44% in December, according to the Catholic University. Government agencies have been closed, costing thousands of jobs. Construction activity has tanked as authorities say they have halted nearly 90% of public works. And beef consumption is at its lowest level in decades—even though officials say beef exports are at their highest levels since 1967.

Milei says his economic overhaul is necessary to restore prosperity to a broke nation ravaged by the world’s highest inflation. His eccentric personality and shock-and-awe remedies have attracted deep interest from billionaires such as Elon Musk, Peter Thiel and Stanley Druckenmiller, the trader who told CNBC that he had bought Argentine stocks with the hope of seeing an eventual economic recovery.

“For the first time in 150 years, we are creating the conditions to convert all of these gifts that God gave us into a promise of prosperity,” Milei said at a recent conference. The changes were never going to be easy, as the president himself warned when he revved up a chain saw at campaign rallies to illustrate how he would attack inflation by slashing the traditionally generous public spending on everything from energy subsidies to inefficient state companies.

But the government and many economists here are betting that the worst has passed.

Inflation data for April, expected on Tuesday, should show a single-digit increase, down from a monthly rate of 25% in December. In the first quarter, the government posted a fiscal surplus—its first in 16 years—as it stopped unchecked money printing that was fueling inflation. That has led the country’s nosediving peso currency to stabilize.

And while central bank reserves are still critically low, the government has accumulated about $12 billion in recent months, according to the Institute of International Finance.

“I see the light at the end of the tunnel,” said Claudio Loser, an Argentine economist at the Washington-based Centennial Group, a consulting firm that focuses on emerging markets.

Milei swept into office last year as Argentina grappled with its latest economic crisis. Unable to tap international markets, the previous government ran up money printing to cover its budget deficit, fueling inflation as the peso lost 90% of its value. Currency and price controls led to shortages of basics like rice and coffee, and automakers suspended production because of a scarcity of the dollars needed to import supplies.

The fiery economist, who describes himself as a libertarian, cut primary government spending by 40% in the first quarter of 2024, largely by slashing financial transfers to provinces, stopping public works, and holding salaries and pensions at steady levels instead of raising them with inflation.

That tactic, known here as “liquefying,” becomes more difficult to maintain as inflation eases, economists say. It also hits the elderly particularly hard. As a result, the government has agreed to now start increasing pension payments monthly to better keep up with inflation.

“The liquefying strategy has reached its limit,” said Hector Torres, a senior fellow at Canada’s Centre for International Governance Innovation and former executive director at the International Monetary Fund. “It is not sustainable.”

Without broader changes to boost the economy, the government’s recent fiscal surpluses will be unsustainable, economists say. But Milei has yet to secure a legislative win for measures that economists say are crucial to really turn around an economy choked off by high taxes and government regulations.

Milei is hoping the Senate will in the coming weeks approve a bill with some 230 articles that would privatize some state companies, loosen stiff labor regulations and increase government revenue by restoring the income tax that was eliminated last year.

That bill is a pared-back version of the government’s original legislation, which featured some 660 articles and faced stiff opposition in Congress, where Milei has little support.

The Milei administration hopes the bill’s approval will signal to investors that Milei is able to pass business-friendly reforms by working with an opposition he’s long berated as a “political caste.”

“It’s vital,” said Malcolm Dorson, senior portfolio manager at Global X, an exchange-traded fund provider in New York that has about $318 million invested in Argentina. “What is being tested is his ability to negotiate and form alliances with other parties.”

Any economic recovery will also eventually require lifting a complicated system of currency controls enacted by the previous, left-wing administration.

While those controls discourage investments, authorities say they can’t lift them yet as they lack reserves to meet demand for dollars.

“They know that by removing controls, it would unleash this huge pent-up demand for dollars,” said Sergi Lanau, who closely tracks Argentina at Oxford Economics, a London-based consulting firm. “He just can’t do it.”

Officials have said they need another $15 billion in reserves to lift the controls. Some of those funds could come from the country’s upcoming harvest of soybeans, a top export earner.

But economists say Argentina will likely need to go back to the IMF for fresh funds, which could be a hard sell after receiving a massive bailout a few years ago. Argentina now owes about $44 billion to the IMF stemming from its 2018 currency crisis.

Milei still has the support of a majority of Argentines, polls show, but confidence in the government has begun to erode as people grapple with the recession.

Carolina Segovia used to receive food for her soup kitchen from the now closed Ministry of Social Development, whose headquarters was in a building with a mural of Evita Peron, the 1950s-era first lady whose social spending defined decades of Peronist policies.

Now, Segovia sells used clothing to buy food. For a T-shirt, she can get about 50 cents. A jacket is around $5. Jeans cost $2. If she sells enough, she can buy a couple bags of potatoes and some condiments.

“While there was hunger before, there is more now,” she said.

Even some of Milei’s supporters are growing weary.

Gabriel Pellizzon, the mayor of Los Surgentes, a town in the conservative agricultural heartland of Córdoba, said most people there still back Milei’s changes even as they struggle to pay higher utility bills. Locals, he said, now eat chicken burgers instead of the more expensive beef patties.

But he wants the government to eliminate taxes on soybean exports, a key source of state revenue that farmers have long said stifles their output. He also wouldn’t mind if Milei eases up on all the spending cuts.

“Society still backs him,” said Pellizzon. “But I’d tell him to stop a little bit, because people are dying of hunger.”

Milei said his measures will soon pay off for a country rich in farming, natural gas and minerals like lithium.

“You want to know how the economy is going to grow?” he said in another recent speech. “It’s going to go up like a scuba diver’s fart.”

Source: Wall Street Journal

Sharing is caring!