Tfrom an American audience, Argentina’s selection may seem unfamiliar. A political outsider with bouffant hair and a history of outrageous ideas promises to make the country “great again”, and is written off by the liberal elite before winning the presidential poll with huge support from the people, many of whom feel left behind. But the election, on November 19, of Javier Milei, a self-described “anarcho-capitalist” is not a repeat of Donald Trump’s playbook in the pampas. Mr. Milei has a far more difficult economic situation than any American president in recent years. Many voted for him not because of his inflammatory rhetoric – but nevertheless, in an act of desperation.
Argentina is in a terrible state. Annual inflation is currently over 140% and is expected to reach 200% early next year. That’s up from 54% when Alberto Fernández, the outgoing Peronist president, took office in 2019. Four out of ten Argentines live in poverty. In the weeks leading up to the election Sergio Massa, the economy minister and Mr Milei’s opponent, mounted a populist splurge in leaflets, equivalent to around 1% of GDP.
The dead country is broken. Public debt to gdp yes 90%; and the fiscal deficit, when properly calculated to include central bank money printing, is about 10% of gdp. Its dollar bonds trade at less than 33% of their par value. External sources of money are used: the country already has debts imf $44bn and its foreign exchange reserves are about $10bn in the red on a net basis (after deducting central bank swap lines and other liabilities). There are at least 15 different exchange rates, including a favorable one for soy exports, sop to the agricultural sector. While the main official wholesale exchange rate is 354 pesos per dollar, on the black market the currency trades at closer to 900.
To face Argentina’s demons, Mr. Milei’s government must take three urgent economic measures. First, fast belt-tightening to bring down the fiscal deficit: unaffordable pensions and fuel subsidies are an obvious area to target. Second, liberalization of the exchange rate system although this will lead to devaluation and inflation. This is inevitable: Argentina no longer has the dollars to defend the official rates. And finally the country must restructure its debts to reduce them to sustainable levels. This may require the imf admitting a loss, or charging low interest rates, on the $44bn of loans it extended to Argentina, which represents one of the biggest mistakes in the history of the fund.
What about dollarization, Mr. Milei’s top policy? When a country’s financial credit is in tatters it may be wise to accept the greenback instead of domestic currency. Eight countries besides the United States use the dollar as legal tender including Ecuador and Panama. However, to do this in an orderly manner requires sufficient time for the complex preparation required and initial large dollars to support the banking system. Both are not in Argentina.
Of course the trio of emergency economic measures are themselves a giant leap. Mr. Milei, who campaigned with a chainsaw to symbolize his approach to cutting down the state, may have won with a large mandate. But he will have a precarious position in the government: his coalition, Liberty Advances, will only have 38 of 257 seats in the lower house of Congress and seven of the 72 seats in the Senate. This means that he has to build alliances, especially with the Republican Proposal, a center-right party led by Patricia Bullrich, a center-right player who was eliminated in the first round of the election in October.
To create such alliances Mr. Milei must be more like a statesman after an unusual life. So far he has relied on segmentation figures and curves for advice. His running mate, Victoria Villarruel, has been downplaying the atrocities of Argentina’s military junta, which ruled the country from 1976 to 1983. His foreign minister has compared same-sex marriage and bugs. Mr Milei has not said who will be economy minister – suggesting he could take the job himself. Instead he must surround himself with mainstream politicians who will help him build a coalition in Congress and maintain public support for painful reforms. Ms. Bullrich and former president Mauricio Macri should put him in his cabinet.
Mr. Milei’s time in power will not be easy. Mr Macri was the first non-Peronist to finish his term in office since democracy was restored in 1983. And despite Mr Macri’s best efforts to push for central reforms -right to be introduced during that time, his time ended with the neighboring country. Mr. Milei must act quickly, but also build a national consensus on economic reform to ensure that his policies do not force Argentines to take to the streets. So far his lack of experience and volatile character do not suggest he can manage this. If Argentina has become an economic casino, it is the last roll of the dice. ■
