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ECONOMY | 05-04-2024 11:14

Milei sees long slog ahead to bring Argentina reforms he pledged

While Milei made shutting down the Central Bank and dollarising the economy centrepieces of his political campaign, he acknowledges plans are going to take a lot longer than he expected. 

Just over 100 days into his administration, Javier Milei is delaying his ambitious reform plans to account for the political and economic realities of Argentina.

Consumer subsidies that allow for US$0.12 subway fares will take as long as three years to be removed, currency controls that have crippled the economy will only be lifted after a clean-up of the Central Bank’s balance sheet, and dollarisation has been thwarted by Argentina’s “dishonest” politicians, the libertarian leader said in an interview with Bloomberg Editor-in-Chief John Micklethwait.

“We have to separate short-term problems from long-term problems,” Milei said from the presidential palace on Thursday. “We said the situation was complicated and required very strong medicine in the short term. We will have suffering and then we will get out of it.”

While Milei made shutting down the Central Bank and dollarising the economy centrepieces of his political campaign, he has been unable to pin dates for them since taking office on December 10.

When pressed on specifics, he acknowledges plans are going to take a lot longer than he expected. 

His 4,000 reforms to deregulate the Argentine state will wait until after midterm elections next year if he can’t muscle them through now. The removal of generous energy and transport subsidies will wait too, so that salaries can cover the massive increase in costs that will ensue. Dollarisation remains as a long-term plan, but markets will decide on its timing, he says, after the Central Bank’s balance sheets are cleared and he reforms the financial system.

Milei, a 53-year-old firebrand who took investors by surprise when he emerged as the frontrunner in last year’s vote, doesn’t see these delays as anything more than minor setbacks. He considers himself as the torch bearer of a multi-year process to remake Argentina into a bastion of capitalism and commerce. Some concessions are needed to ease the short-term pain such transformation is likely to cause voters.

“This is the consequence of having 20 years of populism,” Milei said.

That transformation, according to Milei, has begun. Asked whether Argentina would have a free-floating exchange rate this year, he said the peso’s parallel market rate already plays that role — and celebrated the fact that the gap between the parallel and the official rates has narrowed. The Central Bank’s deficit has been halved and hyperinflation has been avoided, he added.

While for now he’s prioritising moves that don’t require lawmakers’ support or court approval, Milei does need Congress not just to reform the state but to achieve the fiscal surplus his entire plan depends on. He will need lawmakers to raise income taxes, privatise bloated state companies and pass a new pension formula, which was reformed by decree but could be knocked down in the courts, according to Marcos Buscaglia, co-founder of consulting firm Alberdi Partners.

“Investors are aware that minority governments in Latin America have not been successful in general, so he needs a signal that his capacity to pass legislation is there,” Buscaglia said. “He also needs Congress to pass a structural labour reform which is very important because while the government is firing employees and some companies are also firing employees because of the recession, you need new sources of growth.”

Markets have, so far, given him the benefit of the doubt. Sovereign bonds have posted some of the best performances in emerging markets this year, with notes due 2030 jumping to the highest since they were issued when the debt was last restructured.

Last month JPMorgan Chase & Co analysts recommended investors bet on Argentina’s dollar bonds due in 2035, citing a strong environment for distressed sovereigns and Milei’s austerity push. Morgan Stanley analysts, meanwhile, recently recommended some of the countries shorter-term notes, dubbing it “a structural adjustment worth staying for.”

“If our central scenario plays out, Argentina will not default and there is another 33 percent upside potential over the next year,” they wrote in a mid-March report. “The key risk to watch is the political capital of the administration in the near term.”

Voters, like markets, are also sticking by Milei. Support is little changed from when he ascended to office just under four months ago even as inflation soared to 276 percent. Political analysts say he is in a race against time to bring consumer prices back down and hold on to that popularity.

While inflation has come down from month-to-month highs in January and Feburary, the jump in consumer prices has eroded the peso’s value. That fuelled speculation that another one-time devaluation was in the works, or that the government would accelerate a crawling peg that has the peso devaluing at about two-percent a month — an idea Milei dismissed as a “stupidity.”

Despite calls for strikes and protests against his measures, Milei says there are signs the economy could post a strong rebound, which would feed into his political capital and push Congress to support his reform agenda. What he wants, he says, is a degree of economic freedom that Ireland has, and a growth that rivals that of the United States.

“Every reform they don’t let me pass now, I will pass starting on December 11, 2025,” he said. “And we will keep working to make more reforms.”

by Manuela Tobias & Kevin Simauchi, Bloomberg

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