Argentina’s next president, Millay, must tame inflation, turn the economy around

BUENOS AIRES, Nov 20 (Reuters) – Argentina’s newly elected libertarian President Javier Millay has won a bitterly contested election. Now comes the hard part: dealing with economic crises.

Inflation is 143%, net foreign currency reserves are deep in the red, savers are ditching the peso, and a recession is looming – if it isn’t already here. Four out of 10 Argentines live in poverty and a sharp devaluation of the peso is likely.

Millay, who has promised economic shock therapy such as closing the central bank and dollarization, won a runoff vote on Sunday with about 56 percent to rival Sergio Massa’s 44 percent.

Milei now faces the huge challenge of turning around the economy after taking office on December 10. Failure could see the already troubled country suffer a tenth national debt default, rising poverty and possible social unrest.

“This is an economy that is in intensive care,” said Miguel Kigel, a former undersecretary of finance at the Ministry of Economy in the 1990s.

INFLATION

Argentina’s high inflation rate creates huge distortions in the markets and for consumers, with prices changing every week. A central bank poll of analysts predicts 185% inflation by the end of the year.

“One of the biggest challenges for the next administration will be to correct the relative price distortion that the economy has today,” said Lucio Garay Mendez, an economist at consulting firm EcoGo.

“In the context of high inflation and a stabilization plan, a correction is inevitable.

In an effort to reduce inflation, Argentina’s central bank raised its benchmark interest rate to 133%, encouraging peso savings but hurting access to credit and economic growth.

WEIGHT CONTROL

The Argentine peso currency has been stiffed by capital controls since a market crash in 2019, leading to a clunky set of exchange rates where the dollar trades for more than twice the official level, near 350 to the dollar.

Popular unofficial exchange rates include the “blue” dollar, the MEP, and the blue chip swap, although demand for dollars through parallel channels has spawned dozens of different rates over time, including the “Coldplay dollar” and the “Malbec dollar.”

Milei has promised to quickly lift capital controls and eventually dollarize the economy, while a sharp devaluation is likely to bring the official and parallel exchange rates closer together in the near term.

RESERVES OF THE CENTRAL BANK

Argentina’s central bank’s foreign currency reserves are near their lowest level since 2006 and are seen by analysts as negative on a net basis after a major drought hit exports of key crops such as soybeans, corn and wheat.

Low reserves threaten the country’s ability to repay debts owed to main creditor the International Monetary Fund (IMF) and private bondholders, as well as cover key imports. Argentina will have to overhaul its creaking $44 billion IMF program.

The government agreed to an extended currency swap with China to cover some of its costs and had to delay some payments to key trading partners such as Brazil.

RECESSION

Latin America’s third-largest economy is on course to contract by 2 percent this year, according to the latest survey of central bank analysts, partly due to the impact of a recent drought that has halved corn and soybean crops.

Coupled with triple-digit inflation, this is likely to exacerbate poverty levels, with two-fifths of people already living below the poverty line as wages and savings have eroded.

SILVER LININGS?

Argentina, rich in grains, shale gas and lithium, could see a boost next year as better rains help crops, a new pipeline reduces dependence on expensive imports and growing demand for lithium needed for electric vehicle batteries .

Soybeans and corn are expected to have much stronger crops, which will bring in much-needed foreign currency.

“The harvest will help bring a greater flow of revenue into the economy as well as greater production of (the shale oil formation) Vaca Muerta,” said Eugenio Mari, chief economist at the Libertad y Progreso Foundation.

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