Argentina’s progress on fiscal consolidation still challenged by inflation – economist

SAO PAULO (ICIS)–The Argentinian’s government attempt to turn the economy around has had certain successes in the fiscal front, but high inflation is still challenging the outlook as it continues to eat up on gains elsewhere, according to an economist at Buenos Aires-based Fundacion Capital.

Carlos Perez, director at the consultancy, said metaphorically that the Argentinian economy has been released from the intensive care unit but only to be moved on to the general ward of an imaginary hospital, “The economy remains a patient.”

Perez, who was an executive at Argentina’s central bank between 2004 and 2013, said he was impressed with the fiscal consolidation in President Javier Milei’s first nine months in office, but added the challenges ahead remain daunting and a change in society’s mindset – a “regime change”, he said – is needed to make the system functional.

While at this stage most economists think Milei could go 50/50 to success or failure, Perez said his opinion now would be tilted towards a 60% chance of success, because of the quick progress done so far.

ON THE TIGHTROPE
However, a 40% chance of failure is still painfully high for a society which has been battered by half a century of economic up and downs – in the past two decades, more downs than ups.

Many of Milei’s policies are inspired in center-right former President Mauricio Macri (2015-2019), who tried to liberalize one of the closest economies in the world; the experiment worked for a bit, but the return of the center-left Peronists changed course again.

All in all, since former President Nestor Kirchner’s first term (2003-2007), who was then to be succeeded by his wife Cristina Fernandez de Kirchner, the economy in Argentina has lived on steroids, with widespread subsidies which Milei has started to withdraw.

Printing money to fund that spending became the norm. The result is Argentina’s stratospherically high inflation, still running at annual rate of 237% and with monthly inflation still running at over 4% – bringing monthly price rises below that threshold was one of Milei’s key targets.

“The economy has gone into intermediate care, but it is still early to see the light at the end of the tunnel. But considering the fiscal adjustment in these nine months, with respect to the fiscal results that Argentina had in the last 50 years, one has to say that in fiscal terms the government has done a very good job,” said Perez.

“When I say very good, what I mean is that not only you have achieved to cover public spending, but also to cover the payment of the interest on the public debt that you were having because of the recurring fiscal deficits, ie they have achieved a primary surplus.”

However, the cabinet has been able to achieve a primary surplus with drastic cuts to public spending – the start of subsidies’ withdrawal or putting on hold all public works, for instance – which are denting consumption at the same time.

However, Perez says cutting public spending is in a way the healthiest option to achieve a surplus, the other two being by issuing debt or increasing spending, “Both are a little bit bread for today and hunger for tomorrow,” said Perez.

“What happens is that you had hyperinflation on the horizon, and the fiscal imbalance was the implicating variable par excellence. The cabinet chose the healthiest way [to achieve a surplus].”

While there have not been yet widespread redundancies among civil servants, Perez expects that process to happen gradually in the coming quarters, with public authorities setting up schemes for leavers in which, for example, they give them a period of 12 months to find another employment in the private sector.

“The cabinet wants the private sector to be the motor of the economy. That will imply a change in society’s mindset, which has lived in a subsidized system for more than 20 years, accustomed to Nanny State, with a small break during Macri’s term which never amounted to a proper regime change,” said Perez.

“Society is asking for radical change, and the certainty of regime change is not yet installed in the economic agents’ minds. It is very different for the business community to take decisions on investments with an installed, stable regime than to take those decisions under rules which may last as little as one cabinet’s term.”

LIQUIDITY IMPROVEMENTS STALL
Argentina’s fiscal deficits continuously knocked on the door of the non-independent central bank, who kept printing money and ran out of pretty much all its reserves.

During Milei’s first five months in office, up to May, the central bank also overturned that situation and bought approximately $3 billion/month, accumulated reserves.

“However, from June to now it bought less than $200 million in the past 100 days – practically nothing. What’s happening? The real exchange rate today is very similar to what it was before the devaluation of December 2023, ie what was devaluated has been eaten up by inflation,” said Perez.

“The exchange rate between the peso and the dollar is devaluating at around 2% per month, but monthly inflation remains at 4% per month, approximately. And you keep accumulating distortion.”

Many other distortions in Argentina’s economy remain, said Perez, such as currency controls which limit the buying or selling of foreign currency. The government wanted to withdraw those quickly, but it found the treasury’s coffers were very much intertwined with the economy system inherited.

Another bailout agreement with the IMF may also be necessary, he added, to give breathing space to the administration to implement its plans, which the IMF has endorsed.

Like most other bodies, including the IMF, Fundacion Capital is projecting a fall in Argentina’s GDP of 4-5% this year, with a strong rebound in 2025, which will be led by the commodities exports boom coming from both agro and oil and gas.

Petrochemicals-intensive manufacturing sectors, however, may still take a while to feel the recovery in earnest, according to sources, as consumers shy away from big-ticket purchases such durable goods – their pockets are expected to remain squeezed still for a few quarters.

“If you had asked me in December about the chances of success, I would have also said 60% chance of failure, and 40% of success. As of now, I think those values have reversed and we are looking better. It’s still little optimism, but at least we can see an open ending,” said Perez.

“It will depend on how the government succeeds in implementing the cultural change it wants, showing this is not just like the Macri parenthesis but an actual regime change. It has several weaknesses, not least its minority in both Congress and Senate,” said Perez.

“The cultural change must be adopted by society as well, whom I believe this time can clearly see there is not money in the state coffers. Let’s see – but the truth is that society was fed up with the politics of the past years and where they led us.”

Interview article by Jonathan Lopez