Javier Milei has swept the Argentine elections. The controversial libertarian candidate has starred an incontestable victory over his rival. Within a few hours the markets have been optimistic about the victory with all types of stocks skyrocketing on the Wall Street floor (the Argentine stock market is closed for National Sovereignty Day). However, once the euphoria of the elections cools, the main challenges facing a president who has promised to change everything, but who does not have enough weapons to do so, no matter how much he wields his iconic chainsaw, begin to appear.
Beyond dollarization and the ‘destruction’ of the Central Bank of Argentina, of which he said he would like to “literally blow it up so that only the memory of the damage it has done remains,” this may not be the biggest challenge that the new president has to face . His challenge now is go from saying to deed and reform the country and survive to tell the tale. An enormous obstacle, taking into account that experts and analysts point out that reforming the Argentine economy is a much more complex task than it seems.
The first challenge that the libertarian faces is that, despite the overwhelming result, Its most radical program barely has the direct support of 30% of the population, which is the one who voted for him in the primaries and the first round of the general elections. If she has managed to reach 55% in the second round it has been thanks to the almost complete transfusion of the 24 points that voted for the traditional center-right of Patricia Bullrich. Both she and former president Mauricio Macri (of the Pro party) They asked to vote for him to stop Peronism, but not out of enthusiasm for its more radical measures. AND Milei responded moderating his words and his promisesand opening the door of his future Government to figures of ‘macrismo’.
The result is that Milei has had to give up some of its star measures. She is not going to suddenly withdraw subsidies for transportation, gas and electricity, because many of her voters are against her. He is not going to privatize health and education, whose management “is on the side of the provinces,” as he noted in his first message after the victory. And the privatization wave is going to be careful: regarding the YPF oil company, which Cristina Fernández nationalized (at a billion-dollar cost for a state that does not have any dollars left), Milei limited himself to saying that he is going to “put it in order” before considering his reprivatization in the medium term. Even so, Investors have taken note and its stock has soared 38%.
Even dollarization, its main promise, will be delayed. The elimination of the Central Bank will take time, because Inflation remains high and is not going to stop in the short term. “If you cut monetary issuance today, it will take between 18 and 24 months to bring it to the lowest international levels,” she explained. And regarding the lifting of the exchange rate, the prohibition of buying and selling foreign currency freely, Milei explained that we will have to wait to “solve the problem of the leliqs”, bonds created during Macri’s mandate to stop the rise of the dollar, which offer liquidity to the banks, and which account for 90% of all Central Bank debts. Until they are eliminated, the exchange market will not be freed, he explained.
The result has been to create Javier’s derogatory nickname ‘Delay’, ‘delay’ in English, on the networks, since his radical revolution program is going to have to wait years to achieve its objectives. An uncomfortable situation for someone who repeatedly criticized the ‘gradualism’ of Macri, his new ally. Orderly dismantling a tower of parts and patches built over decades is much more complicated than it seems, if you don’t want the country’s economy to suddenly collapse.
And yet, many economists believe that a recession is an inevitable requirement to change the country’s trajectory. “For it to have any significant success, Argentina will need a painful recession and important reforms to improve its business environment and encourage foreign investors and domestic savers to reinvest in the country,” warns Michael Langham, Emerging Markets Analyst at the Global Macro Research team. A situation that can further increase poverty while the country’s economy recovers, and that can do very important damage to its popularity in the short term.
The lack of support for his maximum program is also seen in Congress, where carrying out any project will be a challenge. The two parliamentary chambers are not renewed at once, but in installments, and Milei’s electoral results They have barely served to be the third parliamentary force, far from the two main forces. And in Argentina the support of both chambers is necessary to approve any law, so it is not enough to put together a very complex coalition in Congress: it also needs to have the Senate, in which The absolute majority of its members are Peronists of various stripes.
The result is that Milei will depend on the traditional center-right of Macri’s Pro to approve anything, which will leave him little less than under the tutelage of the former president. But in Congress, the key votes will be in the hands of the Radical Civic Union (UCR), a social democratic party that refused to support Milei in the second round and made some winks to the Peronist Sergio Massa. AND In the Senate he will have to count, yes or yes, on the 37 senators who do not belong to the Peronist coalition that lost yesterday: from social democrats to independent Peronists from small provincial parties. Any law that you want to approve, at least until the legislative elections of 2025, must first pass through the filter of several parties with different ideologies and even opposites to yours. And even if these parties begin to negotiate in good faith, without proposing outright vetoes from the outset, it is unlikely that the ‘chainsaw measures’ will be able to move forward intact.
Break with Brazil and China
“Lula, a communist and corrupt, I would not meet with him,” with these words, Milei put on the table during the campaign one of the legs of the problem that the country will have to face: an eventual break in relations with its main partners. commercial. Throughout the electoral race and during the previous years, the then candidate made it clear that he would break relations with his neighbor due to the ideology of his Government, which he has made clear with a symbolic movement: inviting former president Jair Bolsonaro to his inauguration. of possession. He also, he assured, would do the same with China. Both are, for now, his two biggest partnersso an abrupt cut or even simply a cooling of relations is something that deeply worries investors.
This was the case of Julius Baer’s experts, in whose latest report, and although they believe that he may moderate his political action in the coming months, they pointed out this as one of the key points to follow to evaluate the evolution of Argentine politics. The Abrdn experts think the same, whose analyst Michael Langham points out that China is both the main trading partner and the largest source of financing for a country that needs all the economic weapons it can count on to confront powerful inflation and a weakened economy.
Only during the first quarter of 2022 did Brazil establish itself as the main insurance company in the Argentine foreign market. In fact, exports to the Portuguese-speaking country reached 2,450 million dollars, while its imports stood at 3,262 million. For their part, they sold about 1,222 million dollars to China and bought about 3,928 million in all types of products.
To understand the magnitude of these two actors in the trade balance of the Latin American country, Brazil accounted for about 14.3% of all exports and China accounted for 9%.. The United States, which Milei wants to be the country’s great partner in the coming years, was responsible for 7.6% and Chile for 5.6%. Also adding imports, between the two they account for 35% of all Argentine trade and the problem is not only quantity but also the specific products that arrive from these two countries. To begin with, in the case of China, it is responsible for a large part of the sale abroad of agricultural products such as oil, soybeans, meat, barley or lithium, while China supplies the country with all parts of engines, electrical supplies or vehicles. Therefore, a break with these countries represents a significant challenge for an economy that would have to change from top to bottom a structure that has been operating for years.
For their part, they also fear an aggressive posture of an Argentina led by Milei against the economic union of the region. “Mercosur must be eliminated because it is a defective customs union that harms good Argentines,” the candidate commented in a recent interview. “It is a trade managed by states to favor prebendary businessmen, that destroys trade, it only helps friends of power, a horrible thing.” All this at a time when Mercosur was immersed in a project led by Buenos Aires and Brasilia to launch a regional currency, a Latin American euro with which to advance an economic union.
The renegotiation of the IMF
The last of the challenges is the sword of Damocles that has weighed on the last two Argentine governments: the debt of 44.5 billion dollars that Macri established with the IMF. That loan was to help stabilize the Argentine economy and open it to world markets. Instead, all he did was create a gigantic hole in the accounts of the IMF and Argentina. As long as this loan is in progress, Milei will be tied to a drain through which the precious dollars he needs to abandon the peso will escape. And she won’t be able to ask any other big institution for money.
The analysis houses consider this, along with the election of the economic cabinet, the fundamental factor that will decide his mandate. “With rising inflation, exchange rate pressures and a fragile fiscal environment, Milei will have to comply with the IMF program with which she will have to undertake a renegotiation,” they explain from Julius Baer.
The supranational institution has already congratulated Milei on his victory and prepared the ground for future negotiations. Its president, Kristalina Georgieva, has expressed her best wishes for the Milei legislature and has urged it to meet soon to “work closely to safeguard the macroeconomic stability of the country.” With inflation of 142.7% and a more than discounted recession (2.5% according to the IMF itself), Argentina has a complicated payment schedule that involves a quota of 12,000 million this same month of April.
The agreement signed at the time by former Minister Martín Guzmán included a series of fiscal objectives: reduce the budget deficit below 1.9% of GDP, reduce the printing of money by the Central Bank to finance the Government and quadruple dollar reserves. . Milei comes to power with the promise of meeting all of these goals and more, which, if it happens, could encourage the IMF to be more generous to the country.
But the final problem remains the same: Argentina has voted ‘no’ to Peronism with enthusiasm, and has given a chance to someone who promises a different and revolutionary plan for the economy. But to get it going there are many obstacles to overcome, and if it doesn’t get results soon, or if the costs – a deep recession, painful cuts that leave the lower classes destitute – are much worse than voters are willing to bear , Milei may encounter a social schism in the coming years.