2023-11-20 10:36:34
Elected president of Argentina, the populist Javier Milei immediately promised the “reconstruction” of the country. A major challenge for this former television presenter with a meager political CV.
Ultraliberal economist Javier Milei was elected president of Argentina on Sunday. His promise: “shock therapy” for the third economy in Latin America with record inflation (143%). The 53-year-old president-elect, who will take office on December 10, will face challenges major challenges, particularly economic, but also governance and social peace. We take stock of these many issues.
1. Inevitable budgetary adjustments
“Argentina has, for decades, had a significant budget deficit: a strong culture of social expectations, but little growth, therefore expenses which are no longer financeable”, summarizes historian Roy Hora, from the Conicet research center.
During the presidential campaign, Javier Milei brandished a chainsaw for a long time in his electoral rallies to illustrate his desire to cut public spending. The “shock treatment” that he promised to balance the books aims to reduce public spending (by 15%) and to carry out privatizations, to achieve budgetary discipline required by the International Monetary Fund (IMF), to which the country is struggling to repay a $44 billion loan granted in 2018. A requirement all the more difficult as the foreign currency reserves of the Argentine central bank are close to their lowest level since 2006.
More Javier Milei advocates “a much harsher adjustment” than that requested by the IMF: he also advocates the end of chronic subsidies (transport, energy), a liberalization of prices, the elimination of export taxes.
Failure could lead the countryalready in difficulty, to a tenth default in payment of its sovereign debt and an increase in poverty. “The economy is in intensive care,” said Miguel Kiguel, former finance undersecretary at the Economy Ministry in the 1990s.
2. A risk of social confrontation
This desire to dry up public spending, however, raises a major problem: that of the social impact, in a country where 40% of residents live below the poverty line and 51% receive some form of aid or subsidy.
“The pain will be acute and widely felt if there is a real stabilization plan, and it is not clear that the Argentines see the good side of it,” predicts Benjamin Gedan, Argentina specialist at the American think tank Wilson Center.
“Javier Milei brings with him an ingredient of political-social confrontationa belligerent, aggressive discourse of adjustment towards sectors, such as the public service, with a strong capacity for mobilization”, estimates Gabriel Vommaro, political scientist at San Martin University. “With, perhaps, a repressive waywhich we do not know how it could end.
In an attempt to curb inflation, the Argentine central bank raised the reference interest rate to 133% (…).
3. Record inflation
Argentina’s high inflation rate (143%) creates huge distortions in markets, but also for consumers, with prices changing every week. A survey carried out by the central bank among analysts even predicts inflation of 185% by the end of the year.
“One of the biggest challenges of the next administration will be correcting the relative price distortion that the economy is experiencing today,” said Lucio Garay Mendez, an economist at the consulting firm EcoGo. “In a context of high inflation and a stabilization plan, a correction is inevitable.”
To try to curb inflation, Argentina’s central bank raised the benchmark interest rate to 133%, which encourages savings in pesos, but harms access to credit and economic growth.
4. The dollarization of the Argentine economy
The dollarization of the economy, for abandon a constantly depreciating Argentine peso, is a key to the future president’s program to “dry up” inflation. But how to dollarize a country lacking foreign exchange reserves and dollars?
Easy, dit le camp Milei: use the dollars that Argentines have been saving for years under the pillow. The country “is the third largest in the world in quantity of physical dollars” held. It would be a question of giving them back the confidence and the possibility of using them.
But faced with a official exchange rate considered unreal (369 pesos per dollar), “things could spiral out of control” between now and the inauguration on December 10. Devaluation? Increased inflation? “Opens a period of instability“, according to analyst Ana Iparraguirre, from GBAO Stratégies.
Javier Milei will have to rebuild relations with key countries for which he had very harsh words, notably Lula’s Brazil and China, Argentina’s two main trading partners.
5. Choose your allies to govern
In addition to the economic aspect, the challenges for Javier Milei will also be political. And in this area the former TV presenter has little experience.
Javier Milei’s party, La Libertad Avanza, entered Parliament in 2021 with three deputies. He is now the 3e strength – 38 deputies out of 257 – in a lower room without absolute majoritybut where the Peronist bloc (center-left) remains dominant (108).
Alliances, one-off or lasting, will be essential, as with the right-wing bloc Juntos por el Cambio (93 deputies). But it never seemed so close to imploding, after being torn apart over the question of whether or not to support Javier Milei in the second round.
6. Reconsolidate international relations
The president-elect will have to rebuild relations with key countries for which he had very harsh words, notably Lula’s Brazil and China, Argentina’s first two trading partners.
“I will not do business with communists. I am a defender of freedom, peace and democracy,” declared Javier Milei, for whom his allies are “the United States, Israel and the world free”. Brazilian President Lula, whom he had called a “corrupt communist”, wished him “good luck and success” on Sunday. Beijing also congratulated Javier Milei on his election and said it wanted to continue developing relations between the two countries.
The future president could, on the other hand, bring a new tone to the Falkland Islands questionwhere he said he was willing to negotiate, not Argentine sovereignty, but a long-term solution of the type that led to the handover of Hong Kong to China (1997).
7. The memory of a country under dictatorship
For the first time in 40 years of democracy, a consensus on the legacy of the dictatorship (1976-1983) cracked during the campaign, with Javier Milei’s denial of the death toll and missing figures. There are 30,000, according to human rights organizations, and “8,753”, according to him.
His reference to a “war” (between left-wing guerrillas and the State) rather than “dictatorship” to describe this era was shocking. As his demand for “fair” justice for the soldiers currently in preventive detention (around a hundred) as part of the 360 ongoing proceedings for crimes during the dictatorship is disturbing.
The legacy of the dictatorship, a hyper-sensitive subject, has until now been spared partisan divisions. A breakup could, here too, give material for mobilizations.
Another hope for the country: demand is increasing for its lithium, necessary for electric vehicle batteries.
8. More optimistic outlook
But it’s not all trouble for future President Milei. In theory, the next harvests, in 2024, should offer the country a nice windfall. The historic drought of 2022-2023, the worst in a century, linked to the La Niña phenomenon, had deprived Argentina, an agro-export par excellence, of some 20 billion dollars in revenue. These revenues linked to the agricultural sector will be welcome.
The gradual rise in power of gas pipeline of the gas and oil deposit of Dead cowinaugurated this year, should also save some $10 billion per year of energy imports, according to economist Elizabeth Bacigalupo of the Abeceb firm.
Another hope for the country: demand is increasing for its lithiumnecessary for electric vehicle batteries.
What impact on the markets?
Argentinian markets are closed this Monday due to a public holiday and the impact of Javier Milei’s victory will not be fully felt until Tuesday. However, overseas-listed sovereign bonds and some stocks will be traded on Monday, mainly in Europe and the United States.
“In the short term, bonds will react positively, but we expect pressure on the foreign exchange market due to the uncertainty until December 10”estimates Juan Manuel Pazos, economist at TPCG in Buenos Aires, in reference to the date Javier Milei took office.
During his first speech as president-elect, the ultraliberal promised rapid reforms to recover an economy mired in crisis and where inflation reached 143%. But he also thanked his main conservative supporters, Mauricio Macri and Patricia Bullrich, with whom he concluded an alliance between the two rounds.
“The fact that Javier Milei said he was ready to expand political support and that he also thanked Macri and Bullrich is positive,” observes Martin Castellano, head of Latin America research for the Institute of International Finance (IIF). “That will help stabilize market sentiment in the coming days.”
For Walter Stoeppelwerth, strategist at the management company Gletir, Javier Milei should remain in his position, despite voters’ real fears regarding the consequences of an austerity plan.
“The determining factor is budget commitment. If Milei can convince the market that chainsaw (fiscal discipline) is the heart and soul of his presidency, bonds will recover,” he said. “If he moves toward unifying currency is also a positive point. It cannot be equivocal.”
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