On Tuesday new Economy Minister Luis Caputo, said Argentina peso currency will weaken over 50% to 800 per dollar, cut energy subsidies, and cancel tenders of public works, economic shock therapy aimed at fixing the country’s worst crisis in decades.
Caputo said the economic shock therapy plan that included Argentina peso currency devaluation would be painful in the short-term but was needed to cut the fiscal deficit and bring down triple-digit inflation. He unveiled a package of measures after libertarian President Javier Milei took office on Sunday.
Devaluation of Argentina’s peso currency
The economic shock therapy comes two days after the libertarian Milei was sworn in as president of the second largest economy in South America. He immediately warned of tough measures.
Milei said the country didn’t have time to consider other alternatives.
“The objective is simply to avoid catastrophe and get the economy back on track,” Caputo said in a recorded speech.
He said the country needed to tackle a deep fiscal deficit he put at 5.5% of GDP, adding Argentina had a fiscal deficit for 113 of the last 123 years – the cause of its economic woes.
“We’re here to solve this problem at the root,” he said. “For this we need to solve our addiction to a fiscal deficit.”
Argentina’s ongoing battle with inflation
The South American country Argentina, a major grains producer, is battling inflation nearing 150%, central bank reserves deep in the red and two-fifths of the population is in poverty. It has a wobbling $44 billion loan with the International Monetary Fund.
International Monetary Fund on the measures
“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.”
The IMF called the measures “bold” and said in a statement they would “help stabilize the economy and set the basis for more sustainable and private-sector led growth” following “serious policy setbacks” in recent months.
Argentina’s foreign exchange and grains markets had been locked down on Tuesday as traders awaited the new government’s economic plan. Banks had already anticipated a sharp devaluation, with some weakening their foreign exchange rate to 700.
Argentina’s peso currency pretentiously high
Since 2019, Argentina’s peso currency has been kept artificially strong by strict capital controls which create a wide gap between the official exchange rate of 366 per dollar and parallel rates as high as 1,000 per dollar.
Argentina’s dire situation
Milei, a wild-haired political outsider, had campaigned with pledges for major spending cuts, often wielding a chainsaw at rallies as a blunt symbol of his plans to trim back the state.
“The situation is critical with 45% poverty and 200% annualized inflation,” presidential spokesperson Manuel Adorni earlier told a press conference. “We are heading towards hyperinflation and the objective is to avoid it.
Milei’s tough fiscal rhetoric – with a new mantra “there is no money” – has buoyed markets since his election win, with the S&P Merval stock index (.MERV) hitting a record high on Tuesday and sovereign bonds up nearly 4%.
Opinions on new measures
As per analysts the new measures send a strong message.
“The devaluation announced exceeded market expectations,” said Shamaila Khan, Head of Fixed Income for Emerging Markets and Asia Pacific at UBS Asset Management.
Implementation will be painful
The key doubt is whether Milei, whose libertarian coalition is only the third largest bloc in Congress, can implement the sharp cuts needed to undo the deep fiscal deficit without pushing the South American country towards turmoil and unrest.
“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 central bank, which had new president Santiago Bausili confirmed overnight in the official gazette, said it would undo “transition” checks on FX trades from Wednesday morning that had only allowed priority trades through this week.
