Milei’s Economic Overhaul Faces These Four Hurdles

Javier Milei, presidente de Argentina. (Kobi Wolf/Fotógrafo: Kobi Wolf/Bloomberg)

(Bloomberg) -- Argentina’s president, Javier Milei, warned voters on the campaign trail last fall that the “shock therapy” he would use to stabilize the country’s serially ailing economy would be painful, and his prediction has come true. Consumer price inflation has accelerated since Milei took office on Dec. 10: Prices are up more than 100% through May — and 276% from a year earlier — after he scrapped price controls, devalued the currency and started to cut some subsidies that held down prices for transportation and utility bills.

Wall Street investors have cheered on Milei and pulled Argentina bond prices out of the gutter, though those prices have plateaued more recently. Consumer spending has tanked as high inflation devours wages and pension payments, with the country falling into its sixth recession in 10 years. Milei says his kitchen-sink approach to fixing the economy is necessary to correct the destructive policies of his predecessors, whom he faults for a poverty rate that’s approaching 42%, just below the peak reached during the Covid-19 pandemic and up from 26% in 2017.

Milei’s approval ratings remain high as he predicts a V-shaped economic recovery with robust growth after all the pain subsides. Voters express confidence in surveys that the president will bring down the inflation rate over the next year.

Here are four challenges Milei faces as he pushes for deep government spending cuts that could further test the public’s appetite for change. 

1. Slaying Inflation 

Milei often says his top mandate is to crush inflation, a longtime problem that’s doomed so many of his predecessors. But that will require fixing Argentina’s many structural problems, including a chronic fiscal deficit and a dependency on currency controls — moves that are likely to only worsen inflation in the short run.

Milei stopped letting the central bank print money to fund government spending as it had during the previous administration. He’s also resisting calls to increase the supply of pesos in circulation to match the rising consumer need for cash.

He and his economic team point to some early success: After spiking in December, monthly inflation cooled for five straight months through May. Private economists say that trend likely ended in June as they forecast price hikes sped up again, albeit marginally. Still, Argentina’s annual inflation rate is more than 100 times what’s seen in the US and Europe, while wages are up only 214% from a year ago. That translates into diminished buying power that’s crushing consumer spending and limiting, to some extent, how much businesses can keep jacking up prices.

Many economists express concern that Milei’s strategy to put a lid on inflation is sending Argentina deeper into recession, which isn’t a sustainable way to cool prices. Milei has yet to roll out what locals call a stabilization plan spelling out how the economy will grow and incomes will recover without a big spike in prices.

2. Balancing the Books

Milei is aggressively attacking Argentina’s core problem: a chronic fiscal deficit that’s prompted recurring debt defaults and currency crises. The government posted fiscal surpluses earlier this year, but mostly by slashing pension benefits by more than 30% after adjusting for inflation, a strategy investors view as unsustainable. Milei is also in the process of cutting at least 70,000 government jobs and slashing budgets for bloated state-run companies.

To more fully balance the books, Milei plans to cut generous subsidies that made the price of a subway ride in Buenos Aires as low as 6 cents last year. Eliminating subsidies have proved politically costly for earlier presidents, and Milei has already postponed some price hikes for utilities and public transit after increasing fares. For example, a plan to increase subway fares in April to 574 pesos (about 67 cents at the time) from 125 pesos got pushed back a month, with the government citing “technical issues.” Similar delays have occurred for buses, commuter trains and utility bills.

How quickly or slowly Milei takes these subsidies away from Argentines could have a big impact on the fate of inflation and his popularity, which for now is helping him resist caving to lawmakers’ demands to send more federal funding to the country’s provinces.

3. Maintaining Support From Lawmakers

Milei scored his first major legislative victory in June when congress passed his sweeping overhaul of labor laws, foreign investment incentives and government bureaucracy, among other issues. Beyond the content of the reform package, Milei proved to markets that he can govern with a hostile legislature — a “rat’s nest,” he calls it — where his party holds less than 15% of seats.

On July 9, Argentina’s Independence Day, Milei signed a symbolic pact with 18 of the country’s powerful governors at a historic site in Tucuman province. The document, which lays out 10 agreements on medium- and long-term policies, served as an olive branch signaling his willingness to compromise.

But Milei’s victory lap will be short. One of his top allies, former President Mauricio Macri, already called out Milei on X after the reforms passed, insisting that the federal government must now give more money to the city government of Buenos Aires where Macri’s cousin is the mayor. 

The former president’s party was instrumental in drumming up support for Milei’s reforms. More centrist political leaders in Argentina are demanding Milei restart federal funding for public infrastructure programs he halted. 

4. Re-Entering Debt Markets

Milei inherited a cobweb of currency controls that put the peso essentially in a financial strait jacket by making it hard to exchange them for other currencies. To avoid a wide-scale currency selloff, the government since 2019 has allowed Argentines to legally exchange pesos for only as much as $200 a month and required them to pay a bank three fees that substantially increase the cost of exchanging currency.

The removal of currency controls, which has been a key barrier preventing Argentina from returning to international debt markets, has been eagerly anticipated by investors since the government defaulted on its sovereign bonds in 2020. While welcome by businesses, lifting controls in the near term runs the risk of catapulting inflation even higher into triple-digit territory. That’s because consumers and companies alike could rush to buy dollars and sell pesos at significant levels for the first time in years, pushing down the value of the Argentine currency

Milei says he intends to discard the controls so Argentina operates more like a normal economy with one exchange rate instead of a dozen — one set by the government, another by public markets, another by black markets. But he hasn’t detailed the exact steps or timing, and markets have begun to fret over his strategy for the currency. 

Disarming all the controls is also a key step for Milei to realize his key campaign promise: Allowing the peso and US dollar to co-exist as legal forms of payment — which could result in the full “dollarization” of the Argentina economy if people, given a choice, abandon the peso. But in late March, he conceded dollarization probably wouldn’t happen before mid-term elections in late 2025. 

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