Newly inaugurated President Javier Milei unveiled emergency economic measures to stabilize the economy and currency. The drastic moves aim to curb skyrocketing prices but will likely cause more short-term pain.
Milei Administration Devalues Peso Almost 50% in Surprise Announcement
In a shocking move that rattled markets, Argentina’s economy minister announced on December 12th a roughly 50% devaluation of the peso currency against the US dollar.
The peso will be allowed to float between 315-350 per dollar, plunging from the previous rate of 200 pesos per dollar. The central bank will intervene to prevent more extreme price swings.
“There is no alternative to strong action,” Economy Minister Luis Caputo said in a hastily organized press conference on Monday night. “This provides an anchor for the value of our money.”
The drastic step forms the cornerstone of President Milei’s emergency plan to stabilize the volatile economy he inherited. By realigning the artificially strong peso rate, the government hopes to boost exports and shrink a yawning fiscal deficit.
Table: Key Impacts of Devaluation
| Good for | Bad for |
|---|---|
| Exporters | Importers |
| Inflation may start to fall | Consumer purchasing power reduced |
| Fiscal deficit should shrink | Recession and job losses likely in short term |
This long-anticipated adjustment aim to curb inflation running at 100% annually by making Argentine goods and services more competitive globally. However, it will also certainly fuel another spike in consumer prices and reduce living standards.
“In the short term, there will be more poverty,” said President Milei the day after his inauguration. “But with an economy that works, less poverty in the medium and long term.”
Milei Sworn in with Vows to End “Fiscal Deficit Addiction”
The newly installed leader and his libertarian economic team have ambitious plans to slash government spending and reform institutions.
Javier Milei, an outspoken right-wing economist, took office on December 10th after a surprise election victory in October.
In fiery inauguration speech, Milei blamed decades of mismanagement for leaving Argentinafacing “hyperinflation, poverty, lack of opportunities, and no future.” He compared the bloated public sector to a “parasite” draining the life from the private economy.
“The first step is to accept that we have a fiscal deficit addiction, an addiction to spend more than we have,” declared Milei.
His administration moved swiftly to act. In addition to devaluing the peso, subsidies on utilities and transportation are being phased out. Government ministries have been slashed, eliminating over 90,000 public sector jobs initially.
Milei campaigned on radical free market reforms to open trade, privatize state companies, and eliminate deficits by dramatically shrinking public spending.
By taking harsh action immediately upon taking office, he hopes to swiftly rebalance the economy and boost private enterprise. But he warned, “It will be a shock. Things will get worse before they get better.”
Peso Devaluation Part of Shock Therapy for Economy in Tailspin
The peso depreciation caps a difficult year for the fragile Argentine economy, plagued by currency instability, inflation, capital flight, and talk of default on sovereign debt.
In July 2022, then President Alberto Fernandez’s government imposed strict capital controls to defend rapidly declining foreign reserves. The unofficial “blue-chip” swap rate for dollars soared over 300 pesos, while the official rate remained fixed at 140 with strict limits.
This 30-50% gap between official and unofficial exchange rates created distortions that fueled inflation. By September, annual inflation hit 83%, with prices for basic goods spiking.
Despite an unpopular $44 billion IMF bailout deal, Argentina struggled contain the economic freefall. Efforts to issue new short-term bonds largely failed, exacerbating fiscal pressures.
As the October elections loomed, public anger intensified over the weak economy and falling living standards – opening the door for Milei’s rise.
By allowing the currency to float and cutting subsidies, the new administration hopes taming inflation will restore economic stability. Most experts predict activity will contract sharply near term, however, before seeing any benefits.
Early Support from Markets but Economy Faces Major Hurdles
Financial markets reacted positively to the government’s decisive moves. Argentina’s dollar-denominated bonds rallied to their highest level since 2020 as investors welcomed efforts to address the currency gap.
The Merval stock index jumped 10% on Tuesday before retreating. The peso will likely depreciate further, but the central bank says it stands ready to intervene once the currency stabilizes around a market-clearing rate.
While necessary, analysts view the peso devaluation as only an initial step towards reversing the spiral of runaway inflation, dollar shortages, and economic decay.
“Addressing macroeconomic imbalances through heterodox policies could quickly lead to even higher inflation,” warned credit rating agency Fitch.
Restoring fiscal discipline and business confidence will require deep reforms that likely prove highly controversial. Milei may have won an election mandate for shock therapy fixes, but executing that vision will entail significant hardships.
With debt payments looming, depleted reserves, and the risk of even higher inflation, President Milei faces immense challenges in rescuing the foundering economy. Most experts expect conditions to deteriorate before improving.
“There will be more riots, marches, perhaps a full social explosion,” predicted political risk consultancy Eurasia Group. “But the crisis provides [Milei] cover for aggressive reforms.”
The newly empowered leader remains defiant despite the obstacles. Milei insists he has the cure for Argentina’s “fiscal disease”, but applying treatment will certainly involve more painful side effects first.
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