The government of Ultra Javier Milei has begun the open operation of the Argentine economy and the country is awaiting the consequences. What is most visible 24 hours later is a rapid price increase of up to 100% and the calm reaction of the markets. Economists agree that the situation is critical and requires fiscal adjustment, although there are some differences in the measures taken to implement it. The trade unions and social movements, on the other hand, warn that the chosen course will ruin Argentines and have called emergency meetings to discuss the reactions.
“We found a patient in the intensive care unit who was dying. “We are not prepared to let him die,” argued presidential spokesman Manuel Adorni this Wednesday at the new government’s daily press conference. In doing so, this government is justifying a package of measures that it considers “necessary and unavoidable” and for which it has not yet set out all the details. “We need credibility [internacional] and you can't achieve it by spending more than you have. “This is non-negotiable,” Adorni concluded, adding that the package is only “the background” for further measures to be announced “in the coming weeks” and which, he said, will be “really profound.”
“The immediate consequence of the measures is undoubtedly a sharp increase in inflation,” warns economist Juan Manuel Telechea. Inflation was 12.8% in November, but this figure is already low. Between Monday and Wednesday, the price of meat rose by more than 40% and the price of international airline tickets doubled. Speculation is high and there are still companies that are not selling because they update their prices, while others warn that today's budget may not be valid for tomorrow.
A new option that has gained traction in recent months is covert dollarization. The most famous case is that of rents: supply is very tight and what little is on the market is trying to be negotiated in dollars outside the law. But that formula is expanding into new areas as the value of the peso collapses. A tooth removal that is not covered by basic insurance costs about $400. Customers can pay in US currency or alternatively in pesos at the parallel daily exchange rate. This Wednesday, that price was 1,070 pesos per dollar, 30% higher than the official price.
The biggest blow in the emergency package announced by Economy Minister Luis Caputo was the official devaluation of the peso by 51%: from 400 pesos per dollar to 820 pesos. There have also been announcements aimed at cutting public spending with which they want to save almost three points of GDP: paralyzing public works, increasing pensions by decree, cutting subsidies for transport and energy and transferring national funds to the Provinces. and suspension of official advertising, among other things.
Although Milei promised during the election campaign not to increase taxes, he backed down. A 17.5% tax will be imposed on imports, there will be new withholding taxes on exports, and the change to the income tax (known in Argentina as the profit tax) promoted by Peronism for electoral purposes will be repealed in the final stages of the presidential campaign. With these measures, an income increase of 2.2 points is expected, which, together with the expected cut, completes the planned 5% GDP adjustment.
Economist Telechea expects inflation to be between 30 and 40% per month in the coming months given the scale of the devaluation. If this is the case, he warns, the announced increases in social assistance for the most vulnerable sectors will be “very inadequate”, both because of the level and the difficulty of the state in reaching those who work in absolute informality. 40.1% of Argentina's population is poor and 9.3% are destitute, meaning their income is not enough to buy food.
“The mega-devaluation that has been carried out is worrying because it may have a hyperinflationary solution,” says economist Pato Laterra, a professor at the National University of La Plata. The economist also believes that the lack of price control measures in the plan exacerbates this scenario: “In the last few weeks, since the runoff election [segunda vuelta de las presidenciales]“Prices have increased by 50% and they will continue to increase.”
Stable markets
The International Monetary Fund (IMF) welcomed the measures. They also seemed to please the markets, which traded without major shocks this Wednesday. The price of the parallel dollar remained stable and the so-called financial dollars, which companies rely on to raise foreign exchange, recorded advances of less than 3%. The Central Bank of the Argentine Republic left the interest rate at 133%.
Emiliano Libman, researcher at the National Scientific and Technical Research Council (Conicet) and Fundar, believes it will be important to recognize “the political and social sustainability” of the plan. “We have to remember that it will not happen as it is on paper,” he warns, explaining: “This is the first round of the package: prices will rise, there will be more inflation.” in December, in January, in February… And then there will be a reaction from those who have lost income, from workers and from social movements. It’s a mystery to me how this dynamic will play out.”
Milei assured that the bulk of the cuts would be paid for by the political caste, but the measures show that this will not be the case. “It is nonsense to say that adjustment is done through caste. It’s symbolic,” Libman says. “Obviously it’s not [en el plan de ajuste]. That's impossible because they don't give any numbers. This is not the way to solve Argentina's budget problem. “It's good that there is a symbolic cut in games, but that doesn't move the ammeter,” he adds. According to this economist, “Argentina was in such a delicate situation that it was very difficult to imagine a horizon for the next few months in which there would not be a decline in income,” but he praises that the measures are much more realistic than these promised during the election campaign, such as dollarizing the economy and closing the central bank.
The opposition is waiting for the exact details of the economic measures and the major package of legal reforms promised by the government before making a public statement. So far the most critical voice has been that of trade unions and social movements. Argentina's largest union, the General Confederation of Labor (CGT), has called an emergency meeting this Wednesday to analyze the measures and how they respond to a painful adjustment plan that will fall on the backs of the working class. “There is a total social tsunami,” warned construction union secretary Gerardo Martínez. This sector will be one of the most affected by the suspension of public works, on which almost 400,000 people rely.
The trade unionist Hugo Godoy accused Caputo of “exaggerating the current crisis situation in order to justify unacceptable measures that will increase the poverty rate in Argentina to over 50% within a few days.” Godoy believed that the announced measures had a strong impact on small and medium-sized companies and would represent “industrial murder with the resulting loss of jobs”.
The shock therapy carried out by Milei reminds Argentines of other previous procedures, such as the operation without anesthesia carried out by the neoliberal Carlos Menem in the 1990s. Then as now, the Argentine economy was in a critical situation. The only certainty both sides have is that the surgery will be lengthy and painful.