Libertarian Argentinian president Javier Milei has begun his ‘shock therapy’ for the South American country’s economy by devaluing its currency and announcing aggressive public spending cuts.
The government led by Milei, who was sworn in on Sunday after his surprise election victory last month, has launched its scheme to tackle the worst economic crisis in decades.
As he took office Milei, a self declared ‘anarcho-capitalist’ warned that ‘there is no money’.
He said the economy would worsen in the short term but ‘there is no alternative to a shock adjustment’.
South America’s second-largest economy faces soaring inflation of 143 per cent and a looming recession.
Drastic cuts: New Argentine president Javier Milei’s new government has launched its scheme to tackle the worst economic crisis in Argentina in decades
Four in ten Argentinians live in poverty and the country is the International Monetary Fund’s largest debtor, owing £35billion.
Milei won the election by beating former economy minister Sergio Massa, with 56 per cent of the vote on a platform pledging to fix Argentina’s struggling economy.
The former TV personality said he would dollarise the economy and get rid of the peso as part of his plans to shake the country out of its malaise.
During his campaign he promised to slash public spending – often bringing a chainsaw to rallies to drive home the point – and ‘burn down’ the central bank.
The strategy kicked off in earnest on Tuesday as economic minister Luis Caputo said he will devalue the peso by more than 50 per centagainst the US dollar.
He moved to change the official exchange rate to 800 pesos a dollar, from 366.5, in a televised address after local markets closed.
The central bank will target a monthly devaluation of 2 per cent.
Since 2019, Argentina’s peso currency has been kept artificially strong, creating a wide gap between the official exchange rate of 366 per dollar and parallel rates as high as 1,000 per dollar.
The Argentine central bank has in recent years printed more of the currency, which has caused rocketing inflation and soaring prices for consumers.
The ‘drastic’ advance to devalue the peso against the dollar is part of Milei’s plans to fix the worst economic crisis in Argentina in decades.
Devaluing a currency can boost exports, shrink trade deficits and reduce interest payments on government debts.
The strategy was welcomed by the International Monetary Fund (IMF), which called the plans ‘bold’ and said it will spark private sector growth.
‘I welcome the decisive measures,’ IMF chief Kristalina Georgieva said, calling it ‘an important step toward restoring stability and rebuilding the country’s economic potential’.
On Tuesday, Caputo said: ‘The objective is simply to avoid catastrophe and get the economy back on track.’
He said that the country needed to overcome its ‘addiction to a fiscal deficit’, which he put at 5.5 per cent of GDP.
Argentina has had a fiscal deficit for 113 of the last 123 years – the provoke of its economic woes – he said. ‘We’re here to overcome this problem at the root,’ he said. ‘For this we need to overcome our addiction to a fiscal deficit.’
Public spending cuts that were announced on Tuesday included slashing fuel and transport subsidies and freezing what is spent on some major government contracts.
Caputo said he was trying to avoid hyper-inflation amid the worst economic legacy in Argentina’s history.
He said: ‘We are going to be worse off than before for a few months, particularly in terms of inflation.’
‘And I say that because, as the president says, it is better to tell an uncomfortable truth than a comfortable lie,’ the economic minister added.
Analysts have also warned that the economic scheme will be ‘painful’ and Milei may struggle to pass some of his key policies as his coalition is only the third largest group in Congress.
‘The adjustment will be painful, and the path forward is laden with economic, political and social risks,’ Fitch Ratings said in a report.
‘Milei’s party has little representation in the legislature and controls no provincial governorships, alliances with more influential parties and power-brokers remain in flux, and the social situation is fragile.’
‘The devaluation announced exceeded market expectations,’ Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management, said.
‘Some details were announced on the fiscal adjustment that will be needed such as reduction of subsidies and decrease in public expenditure.
‘Implementation will be key.’
Some links in this article may be affiliate links. If you click on them we may earn a small commission. That helps us fund This Is Money, and keep it free to use. We do not write articles to encourage products. We do not allow any commercial relationship to affect our editorial independence.
