Argentina's annual inflation is above 140% and is expected to hit 200% within months. Four in ten people are living in poverty. The value of the peso has collapsed by more than 90% against the US dollar in the past four years, while dollar bonds trade at less than 33% of their par value. A bewildering assortment of different exchange rates – as well as complex controls on capital, prices, imports and exports – have crippled investment. And public debt has soared to 90% of GDP.
In an effort to prevent collapse, the outgoing Peronist government (the left-nationalist party that has dominated Argentinian politics for decades) resorted to ever more money-printing, fuelling the inflationary spiral and putting off the day of reckoning.
The country owes $44bn to the International Monetary Fund (IMF), and the central bank is effectively in $10bn of debt (once central bank swap lines and other liabilities are deducted from its reserves).
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Who is Javier Milei?
Javier Milei is the self-styled “anarcho-capitalist” and former TV pundit who was sworn in as the president of Argentina on 10 December 2023, having won the November election. Milei, a trained economist who names his dogs after famous free-market thinkers, is a radical libertarian who campaigned on a platform of sweeping economic “shock therapy” and privatisation, pledging to take a “chainsaw” to government spending to tackle Argentina’s triple-digit inflation and growing poverty.
Milei’s most radical ideas and controversial proposals are to shut the central bank and “dollarise” the Argentinian economy – abolishing the national currency, the peso, and adopting the US dollar in its place, with the aim of controlling inflation and encouraging fiscal discipline. He’s promised to bring forward a massive package of reforms to the legislature.
However, Milei’s Libertad Avanza (“Freedom Advances”) coalition is only the third-largest group in the lower house of Congress, meaning he could well struggle to get his programme through.
What are Milei's plans and will they work?
He’s expected to announce a drastic fiscal tightening; the removal of foreign-exchange restrictions (probably resulting in another big fall in the peso, helping competitiveness but ramping up the public debt burden); and the privatisation of state-owned enterprises.
But there’s a big question mark over his core proposal of dollarisation, says The Economist. Yes, eight other countries use the US dollar as legal tender. But to do this in an orderly manner “requires elaborate preparation and a large float of dollars with which to back the banking system. On both counts Argentina fails”. Dollarising without sufficient dollars is “like saying you want the entire population to wear Nike trainers, even though you don’t make them and you don’t have the resources to buy them”, former IMF official Alejandro Werner told Bloomberg. It’s also a big risk – abandoning a national currency leaves policymakers few levers to deal with external shocks (making an “internal devaluation”, and a popular backlash, more likely).
Its proponents argue that the experience of other Latin American countries shows that it can work. El Salvador, Ecuador and Panama (admittedly all much smaller economies than Argentina) have all dollarised and have lower inflation and higher growth. Dollarisation would not be a panacea. But it would control high inflation and make Argentina much more attractive to investors craving stability, says Ben Ramanauskas on CapX.
And while it’s “true that the central bank is short on dollars, the people of Argentina are not”. They hold an estimated $246bn of US currency either in foreign bank accounts or stashed away somewhere safe. Getting them to deposit that money in domestic accounts would be a tough sell, but formal dollarisation would be a powerful signal that their money is safe in Argentina. However, it’s not yet clear whether Milei will follow through on his pledge, and there are signs of a more moderate approach.
He’s already started to tack to the centre. Media reports suggest that Demian Reidel, a veteran investment banker who worked at the central bank under Mauricio Macri, will be appointed as Milei’s central bank chief in place of Emilio Ocampo, the economist behind Milei’s dollarisation plan. Another Macri ally, Luis Caputo, is running Milei’s economic transition team and is expected to become economy minister. Meanwhile, Milei has toned down his rhetoric and flew to Washington DC for two days of talks with White House officials, the US Treasury and the IMF.
Encouragingly, Milei does seem keen to win friends and influence people. He’ll need to. Meanwhile, financial markets gave a warm welcome to Milei’s election – with bonds and stocks both posting strong gains – on expectations that he will be heavily reliant on the support of mainstream conservatives.
It’s unlikely to be a smooth ride. Macri was the sole non-Peronist president to complete a term in office (2015-2019) since the restoration of democracy in 1983, and the disturbing links of some in Milei’s camp to Argentina’s past dictatorship are likely to inflame tensions in an already fractious nation.
Drastic fiscal tightening of the kind Milei seeks “will be much less popular among Argentine voters than it is in the bond market”, notes William Jackson of Capital Economics. And Argentina’s short electoral cycle means that Milei must very quickly build a national consensus, or risk a massive popular backlash as the short-term effects of his policies begin to bite. So far, Milei’s “lack of experience and volatile character do not suggest that he can manage this”, says The Economist. If the economic situation implodes, social unrest may well follow. “Yet if Argentina has become an economic casino, Mr Milei is the last roll of the dice.”
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