Argentina’s next president, Miley, must curb inflation and turn the economy around

BUENOS AIRES, Nov 20 (Reuters) – Argentina’s liberal president-elect Javier Millei has won a close election. Now comes the difficult part: dealing with the economic crisis.

Inflation has reached 143%, net foreign exchange reserves are in deep deficit, savers are abandoning pesos, and a recession is imminent, if not already here. Four out of 10 Argentines live in poverty, which could lead to a sharp devaluation of the peso.

Mr Millei, who has pledged economic shock therapy such as closing the central bank and dollarization, won Sunday’s second round of elections with about 56% of the vote, compared to Sergio Massa’s 44%.

Millais now faces the huge task of rebuilding the economy after taking office on December 10. If it fails, the already beleaguered country could suffer a 10th default on its debts, increasing poverty and sparking social unrest.

“The economy is in intensive care,” said Miguel Quiguel, a former finance minister at the Ministry of Economy in the 1990s.

inflation

Argentina’s high inflation rate creates significant distortions in the market and consumers, causing prices to fluctuate weekly. Inflation is expected to reach 185% by the end of the year, according to a central bank survey of analysts.

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

“Given high inflation and stabilization plans, adjustments are inevitable.”

Argentina’s central bank has raised its benchmark interest rate to 133% in an effort to curb inflation, encouraging savings in pesos but hurting access to credit and economic growth.

peso control

Argentina’s peso currency has been bound by capital controls since the market crash in 2019, making the exchange rate unwieldy, with the dollar trading at nearly 350 yen to the dollar, far more than twice its official price. has been done.

Popular unofficial exchange rates include the “blue” dollar, the MEP, and the blue-chip swap, but dollar demand through parallel channels has led to dozens of different exchange rates over time, including the “coldplay dollar” and the “malbec dollar.” rate has been generated.

Mr. Millais has promised to quickly lift capital controls and eventually dollarize the economy, but there will likely be significant devaluations in the near future to bring the official and parallel interest rates closer together.

central bank reserves

Argentina’s central bank’s foreign exchange reserves are near their lowest level since 2006, and analysts say they are on a net It is widely seen as being in negative territory.

Low foreign exchange reserves threaten not only the country’s ability to service its main creditors, the International Monetary Fund (IMF) and private bondholders, but also its ability to finance key imports. Argentina will need to review its massive $44 billion IMF program.

The government has agreed to extend a currency swap with China to cover some of the costs, forcing it to postpone some payments to major trading partners such as Brazil.

recession

Latin America’s third-largest economy is expected to shrink by 2% this year, in part due to the recent drought that cut corn and soybean crops in half, according to the latest central bank analyst survey.

On top of triple-digit inflation, this could drive poverty levels even higher, with salaries and savings eroded and two-fifths of people already living below the poverty line.

Silver lining?

Argentina is rich in grain, shale gas and lithium, with increased rainfall boosting harvests and new gas pipelines reducing dependence on expensive imports, increasing demand for lithium needed in electric car batteries. Therefore, economic growth may be expected next year.

Soybeans and corn are expected to have much better harvests, bringing in much-needed foreign exchange.

Eugenio Mari, chief economist at the Libertad y Progreso Foundation, said: “The harvest, like the increased production of Vaca Muerta (shale oil formation), will help bring a significant income stream into the economy. Deaf,” he said.

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