For the Javier Milei libertarian administration the bottom line is very plainly a fiscal surplus but for most economists it is almost invariably growth. The upcoming midterms seem to reinforce rather than conflict with this primacy of the fiscal surplus, which is seen as the key to taming inflation, in turn the government’s electoral trump card. Unfortunately for the government, the money supply is not the only monetary variable with the exchange rate rearing its ugly head every now and then, as has occurred in midyear due to a combination of mostly seasonal or one-off factors – a clumsy closure of LEFI bonds leading to a flood of peso liquidity, the midyear bonus, winter vacations and the customary electoral jitters. To prevent a volatile dollar from passing through to prices, the Central Bank has jacked up interest rates to lure money back to the peso.
Prices have remained under control for the last six weeks (although without driving down the dollar) although this is not only due to higher interest rates – the liberation of imports also works against domestic price increases. Insofar as interest rates can take the credit, it would be for slowing down the economy and hence demand to the point of stagnation if not yet recession (economic output was fractionally lower in May than April), the antithesis of growth – classic economics teaches us that higher interest rates discourage consumer spending in the direction of saving and potentially investment (which, however, does not operate in such short cycles as the money markets).
Any recessive trend is unlikely to bite hard enough in the immediate term to affect the midterm results unduly but it could end up jeopardising Milei’s re-election ambitions. Some observers are reminded of the last years of the past century. Argentina historically has single-digit employment, whether in good times or bad (in part because of labour law inflexibility, an obstacle which the libertarian government would urgently seek to remove if it mustered the parliamentary clout) but in 1995 it peaked at 18.4 percent, partly due to global turbulence at the time but perhaps mostly because of the major productivity gains made amid the macro-economic stability of convertibility. This high unemployment did not prevent Carlos Menem from comfortably securing re-election that year but it was a factor in denying him any hope of a third term. Since Milei has repeatedly expressed admiration of Menem (with two Menem cousins a key force in the decision-making of his sister, presidential chief-of-staff Karina Milei, who seems to have the last word in everything) and since drastic productivity gains appear the only way for business to become competitive if denied the option of raising prices for which the money is promptly printed, could that fin de siècle scenario be making a comeback three decades later?
There is at least one difference with the last decade of the past century and it might well serve to deepen any recession resulting from tight money. In that decade foreign trade investment in Argentina increased fivefold – that was when Carrefour now making its exit entered, for example – while the ample credit possibilities in that period eventually led to the debt crisis ending in the default of 2001. In contrast, significant foreign investment beyond the odd fracking or mining project still looks a distant horizon even after the midterms, when 90 of the 257 deputies would be the optimal scenario for the government, a long shot leaving them far from an overall majority – Milei would first need a 2027 re-election which the absence of investors would make more difficult. Above all, those abroad are waiting for Argentines to invest in their own country. Country risk is significantly down from 20 months ago but still high enough to keep international credit markets at a distance.
Two centuries ago the British poet Samuel Taylor Coleridge defined the prelude to opening a book or going to a play (or a movie these days) as “the willing suspension of disbelief” – this would seem to be the mentality in Argentina these days where around 70 percent of the population are struggling to make it to the month but something like a half retain their faith in Milei´s admittedly original approach to governance. Coleridge’s “willing suspension of disbelief” is supposed to last only a few hours in the case of a play or a few days for a book but the Argentine people are being asked to sustain it for three months at least – the question becomes: Is it sustainable?
by EDITORIAL
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