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ECONOMY | 24-05-2024 14:48

Rich investors cheer Milei as Argentines bear brunt of austerity

Amid Wall Street and investor optimism, critics are questioning how long Javier Milei's spending cuts can be sustained without permanently damaging the economy or fraying the social fabric.

From the Milken Institute in Beverly Hills this month, a beaming Elon Musk flashed two thumbs up beside President Javier Milei and recommended investing in Argentina. 
That came a day before billionaire Stanley Druckenmiller glowed over Milei in a CNBC interview. Silicon Valley investor Peter Thiel visited him at the presidential palace in February, then again a few weeks ago. Political risk guru Ian Bremmer raved about Milei’s policies in an eight-minute video in May, saying his cuts to government spending were just what the country needed after years of roaring inflation and sluggish growth. 

But that same austerity push that’s stoking Wall Street’s optimism, pushing up bond prices and strengthening the peso, is having a devastating effect on the ground in Argentina, where more than 2,000 public works projects have been halted to save money, even though some were nearly at the finish line. Critics question how long the spending cuts can be sustained without permanently damaging the economy or fraying the social fabric. They speculate that at some point, the combination of falling incomes, job losses, higher subway fares, steeper energy costs and failing infrastructure could undercut Milei’s mandate.

Two days after Musk was fawning over Milei, about 40 bundled-up kids were teetering around a cold, open-air garage on the outskirts of Buenos Aires because his administration had halted renovations on a daycare centre. Called Little Ray of Sunshine, it sat in the city of Florencio Varela behind a freshly painted white fence, only needing a gas connection switched on and the keys handed over. But that costs money, and Milei isn’t spending.

“What’s at stake here is the dignity of thousands of kids,” said Carina Andrea Ferreyra, the director of the government-run daycare, which has operated out of her home’s garage for more than 18 months despite her not getting a peso in rent. “They don’t know there’s something better out there.”

Of course no-one thinks that Milei has a vendetta against kids. Instead, what’s happening is what the president warned Argentines was coming after he took office promising “shock therapy”: an incredibly painful, albeit hopefully temporary, bout of belt tightening that will cause suffering in the short term. The sacrifices — a feature of Milei’s plan, not a bug — are intended to crush inflation that approached 300 percent in April and repair an economy that’s underperformed for decades.

Milei’s budget cuts have included taking a chainsaw to social security and public wages, along with consumer subsidies. He’s also withheld some US$2 billion in payments owed to energy companies as part of the efforts to conserve cash. 

Early signs are that the frugality is working. Argentina recently posted its first quarterly surplus in 16 years, celebrated by the International Monetary Fund in its latest review of the country’s US$44-billion rescue programme.

Perhaps most significantly, monthly price increases have slowed since Milei took office December 10, easing to 8.8 percent in April from 26 percent in December. His economic team sees the trend continuing, and investors have been rewarded. Argentina’s benchmark dollar-denominated bonds due in 2035 have returned about 65 percent since Milei won elections in November, data compiled by Bloomberg show.

But social unrest looms as a significant threat in a country with a historically fragile tolerance for austerity. Past attempts at belt-tightening have resulted in rock-throwing riots outside congress. Still, two nationwide strikes against Milei haven’t dented his popularity, which remains among the highest in Latin America. Just recently, he was featured on the cover of Time magazine in an article about the early days of his Presidency.

“The markets are a bit more euphoric than we think they should be given the macroeconomic fundamentals,” said Gonzalo Lacunza, an economist at Empiria, a Buenos Aires-based consultancy firm. “But it’s true they are sending a clear message about reaching a fiscal surplus, whatever the cost.”

 

construction, public works, stalled, milei, cuts
Paused construction on an underpass for a provincial freeway in Burzaco (Sarah Pabst/Bloomberg).

 

Florencio Varela officials say they were stymied in their efforts to find out from federal counterparts what was going on with the daycare. After Bloomberg News pressed the government for comment, Milei’s spokesman said federal officials are working to open it and five other daycares.

The child care centre was one of more than 500 that the previous administration promised but never finished for families in a country where more than 40 percent of the population lives below the poverty line. Major highways, bridges and housing projects started by former governments are also frozen, with little clarity on when or if they’ll restart. 

Milei has argued that public-works projects are a hotbed for corruption, bribes and mismanagement and will be handled by the private sector going forward. He’s bragged about gutting infrastructure spending by 87 percent in the first quarter from the same span a year ago.

“In general and as a matter of common sense, those projects that are almost done will be completed,” Finance Secretary Pablo Quirno said in an interview. “In every new government, there’s a transition. We are in that process.”

The collapse in public works sent construction nosediving in March. Activity plunged 42 percent, its worst annual decline since the peak of the pandemic lockdowns. Argentina lost 48,000 construction jobs from November to February, or 11 percent of the total in the sector, according to the INDEC national statistics bureau. 

“Public works went from 100 to 0. I’ve never seen anything like it,” said Gustavo Weiss, president of Argentina’s construction chamber. “Even the most developed countries have important infrastructure demands, and less developed countries like ours have an infinity of needs.”

Provincial governors and other proponents of infrastructure spending say that without working roads, ports, tunnels and bridges, the economy can’t operate. The governors of the Patagonian provinces of Río Negro and Neuquén sent a formal request asking the federal government this month to turn over control of four key highways they claim are falling apart, newspaper La Nación reported.

In Burzaco, an industrial hub an hour south of Buenos Aires, construction has halted on a nearly-complete underpass for a provincial freeway. The project is meant to alleviate congestion on a four-block stretch of road that can take up to 20 minutes to cross during rush hour. The roughly US$2.9-million project financed by the national government was supposed to be done last year, but took longer than expected. Construction was stopped in January due to a lack of funds.

“It’s such a pity,” said Jorge Reigada, 60, a local shopkeeper. He understands the reasons for Milei’s austerity push, and even appreciates the effort to some extent. But he laments its indiscriminate nature. “Every public work is put in the same bag, when there should be priorities.”

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by Manuela Tobias, Bloomberg

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