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“We are really, really happy,” Argentine President Javier Millay declared on local radio after the country's inflation rate fell more than expected to 13% in February. However, this is a monthly number. Over the past year, his percentage has reached 276%, the highest in the world. Inflation at just 8% a year is roiling politics in wealthier countries. The fact that Mr. Millais, with some justification, saw fit to celebrate a monthly inflation rate of 13% shows just how bad the economic mess he inherited is and how much he has done to repair it. It shows what is left behind.
Premium Argentina President Javier Millay (AFP)
Milley, an angry outsider and self-proclaimed “anarcho-capitalist,” campaigned brandishing a chainsaw and promising to cut spending. On December 10, he took over a bloated state running a huge budget deficit financed by money printing. Inflation was rampant. The value of the peso was thrown away. The government owed $263 billion to foreign creditors, including $43 billion to the IMF, but no dollars at all. Like many Argentine governments, the previous government spent far beyond its means to buy popularity, while devising increasingly absurd temporary macroeconomic policies (such as strict price controls) to keep the economy teetering. did.
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Mr. Millais is leading the country down a dangerous narrow path, abandoning those dangerous solutions. His basic political problem is that the mainstay of his popularity is his harsh attacks on the establishment and ordinary politicians, a group he calls “caste.'' But since its members control parliament, it will need some support from the party to carry out sweeping reforms. But making too many deals would jeopardize his outsider status and thereby his only real political asset: popular support. .
After 100 days, he can boast of true financial success. Despite his lack of support in Congress, he remains popular. If he can retain popular support until midterm elections late next year, he could dramatically strengthen his influence and his ability to rebuild Argentina's economy. However, the Argentine is already suffering deeply and could abandon him much sooner than that. That would be a blow to radical reformers around the world.
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Let's start with his financial success. To show that there will be no more money printing, Milley is obsessed with achieving a budget surplus, meaning the government pays more in taxes than it spends. He said the country will achieve a surplus of 2% of GDP (before interest payments) this year, a significant change from last year's 3% deficit. In both January and February, the government achieved its first monthly surplus in more than a decade. That was achieved, in part, by using Mr. Millais' chainsaw to cut energy and transportation subsidies, local transfers, and capital spending. He also relied on la licuadora, a blender, another tool. Increasing spending below the rate of inflation is a reduction in real terms, known in Argentina as a requación. Spending on contributory pensions, the single largest budget item, fell by nearly 40% in real terms compared to the first two months of last year.
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The government took two other major steps. In December, it devalued the peso by more than 50% to partially bridge the gap between the official and black market exchange rates. But it pushed up inflation. The rate cut in December was similar. Central banks typically raise interest rates to combat inflation. The banks' rationale was that lowering interest rates would reduce interest payments on their bonds, reducing the amount of money in circulation. Inflation initially rose to a monthly rate of 26% in December. It was a blow to the Argentine, but Millay's blender was supercharged.
The government says the results vindicate its tough choices. Even though monthly budget surpluses and inflation rates are currently on the decline, the difference between the official and black market exchange rates is only about 20%. Foreign exchange reserves increased by more than $7 billion. And the government succeeded in extending the maturity of the accumulated peso debt, relieving pressure on the Treasury. The IMF is pleased. The market is starting to believe. Argentina's country risk index, an indicator of the likelihood of debt default, is on a reassuring downward trend. On the economy, I'd have to give him an 8 or a 9 out of 10, enthuses Andres Borenstein of the Buenos Aires consultancy Econviews.
meaning is important
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However, the cost is enormous. An estimated 50% of Argentines live in poverty due to inflation, up from 38% in September last year. In real terms, salaries have been reduced by 20 years, according to Invec, another consulting firm. Prescription drug purchases fell by 7%. Total sales of pharmacies fell by 46%. Small business sales volume in January decreased by nearly 30% compared to the same month last year. Bank Barclays estimates that the economy will contract by 4% this year.
Such difficulties could literally become dangerous for the president. In 2001, some people fled the president's office, the Casa Rosada, by helicopter out of fear of violent protesters. But despite the economic pain, Milais' approval rating remains remarkably high at around 50%. This is mainly due to his success in blaming caste for getting Argentina into this mess.
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Still, Millay's first 100 days were met with serious problems. Besides the pain, economic planning is fraught with uncertainty. Her one of the risks is the exchange rate. In an attempt to slow inflation, the government devalues the peso by 2% every month. However, this is probably below the required level, as monthly inflation is well above her 2%. Sadly, a faster rate of appreciation or a sudden sharp devaluation could cause further inflation.
Argentina will inevitably be forced to switch to a new currency and exchange system in the near future. The question is when and under what system. Millay's plan is to abolish capital controls and standardize exchange rates. But will the government introduce a legitimate peso currency program, or will it seek to dollarize the economy? Mr. Milay's campaign promise to dollarize has been ambiguous since his inauguration. The government is now talking more about “currency competition” (allowing transactions in dollars or pesos). However, when asked if dollarization was out of the question, Finance Secretary Pablo Quirino was ambiguous. Dollarization is “basically a way to bury money” [money] printing presses,” he says. It's a “more moral argument.” Uncertainty is already causing anxiety among investors. The government has also indicated it will explore a new IMF program, perhaps worth $15 billion, but that too may be difficult without a clearer plan.
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Another problem is that forcing a recession to suppress inflation is painful. “It's not attractive to invest in countries where recession is a key factor in monetary policy,” said Eduardo Levi Yeyati of Buenos Aires' Torquato di Tella University. Moreover, inflation could pick up once growth picks up, he added.
Finally, it may be difficult to maintain these fiscal surpluses. February's surplus is already smaller than January's, and the economic recession is taking a big toll on tax revenue. One of his major savings was energy subsidies, many of which were only postponed, not cancelled. Governors angrily protested the reduction in deportation funds, including in court. Although the current pension system helps reduce government spending, it will ultimately have the opposite effect if inflation falls.
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Politics was at its most turbulent. Milley remains popular, but her coalition has no governor and only 15% of the seats in the lower house. The massive 664-article omnibus bill he submitted to Congress in late December has been dismantled. In the end, he withdrew it and suffered a shocking defeat. The lack of priorities also hurt. The deregulation of fishing licenses and the closure of the National Theater Institute are irrelevant next to pension reform. But all of this together slowed the bill's progress and gave it countless reasons to vote against it.
Previous sweeping executive orders had the same problem. It ranged from significant deregulation of the labor market to a smaller one that allowed banks to charge more interest on credit card debt. On March 14, the decree was rejected by the Senate, raising concerns that Milley was politically weak. (The statute remains in effect unless the House also votes against it.) His efforts to undermine labor reforms and unions are also entangled in the courts.
Mr. Millais also made a simple mistake. This month, opposition parties highlighted a decree signed by Millais that, among other things, would give him a 48% pay rise, a damning take for the fiscal chainsaw wielder. He said the wage increase was the result of a past executive order that he quickly rescinded and fired the labor secretary.
Over the next 100 days, politics and economics will intertwine. The government hopes to improve fiscal health by at least 1 percentage point by reinstating the income tax and other tax reforms. The pension system also needs to be updated as soon as possible. All of this requires parliamentary approval. Milley also needs success in Congress to reassure investors that he has enough allies to stave off, or at least weather, future protests and political turmoil. He is far from impeached. “There are so many bombs ticking,” says Sebastian Mazzuca of Johns Hopkins University.
He seems to be aware of the problem. On March 1, he opened a window for negotiations on the May Agreement, a set of free market principles. The interior minister then met with influential state governors who influence parliament. Many of them looked somewhat depressed. The deal includes restoring some transfers to the states and reinstating the income tax (which both sides want, but no one wants to concede) in exchange for delegating some emergency economic powers to the president; This could include pension reform and mining and energy deregulation. There will be plenty of other parking.
stubborn aesthetics
But it is unclear whether that will be enough for Mr Milley, who still boasts that he will not “concede an inch” on his fiscal plans and has called senators who voted against his legislation “enemies of society”. Kirno insists the government will meet its fiscal goals “no matter what”. He threatens that if tax reform is blocked in Congress, the government could continue to withhold transfers to rural areas to make up the difference. That would be explosive.
Mr. Millay's fate depends on two unknown factors. How much economic pain can the Argentines endure before attacking him? And will it be able to garner the political support needed to achieve economic development fast enough to prevent total collapse? So far, the signs are moderately positive. If successful, he could have an advantage in next year's midterm elections. But if his poll numbers fall first, his rivals are sure to wield chainsaws against his plans. And they're going to try to throw his entire presidency into a blender.
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