BUENOS AIRES, Nov 20 (Reuters) – Argentina’s libertarian President Javier Milei has won a closely fought election. Now comes the hard part: dealing with financial crises.
Inflation is at 143%, net foreign exchange reserves are deep in the red, savers are ditching the peso, and a recession is looming – if not already here. Four out of 10 Argentines live in poverty, and a sharp devaluation of the peso is likely.
Milei, who promises economic shock therapy such as closing the central bank and dollarization, won a second-round vote on Sunday with around 56% to rival Sergio Massa’s 44%.
Milei now faces the huge challenge of turning the economy around when he takes office on December 10. Failure could see the already crisis-hit country suffer a tenth of sovereign debt defaults, rising poverty and possible social unrest.
“It is an economy that is in intensive care,” said Miguel Kiguel, a former finance minister in the economy ministry in the 1990s.
INFLATION
Argentina’s high inflation rate creates huge distortions in markets and for consumers, with prices changing weekly. A central bank survey of analysts predicted inflation of 185% by the end of the year.
“One of the biggest challenges for the next administration will be to correct the distortion of relative prices that the economy has today,” said Lucio Garay Mendez, economist at consulting firm EcoGo.
“In a context of high inflation and a stabilization plan, a correction is inevitable.”
In an effort to curb inflation, Argentina’s central bank has raised benchmark interest rates to 133%, encouraging peso savings but hurting access to credit and economic growth.
PESO CHECKS
Argentina’s peso currency has been shackled by capital controls since a market crash in 2019, leading to an unwieldy range of exchange rates, with dollars trading at well over double the price at the official level near 350 per dollar. dollar.
Popular unofficial exchange rates include the “blue” dollar, MEP, and blue-chip swap, although demand for dollars through parallel channels has spawned dozens of different rates, including a “Coldplay dollar” and “Malbec dollar.”
[1/5]Argentine President-elect Javier Milei speaks to supporters after winning Argentina’s re-elected presidential election in Buenos Aires, Argentina November 19, 2023. REUTERS/Agustin Marcarian Acquire License Rights
Milei has promised to quickly lift capital controls and eventually dollarize the economy, while a sharp devaluation is likely to bring the official and parallel rates closer together in the near future.
THE CENTRAL BANK’S RESERVES
Argentina’s central bank foreign exchange reserves are near their lowest level since 2006 and, in net terms, are widely seen by analysts to be in negative territory after a major drought hit exports of key cash crops such as soy, corn and wheat.
The low reserves threaten the country’s ability to repay debts to major creditors, the International Monetary Fund (IMF) and private bondholders, as well as cover key imports. Argentina will have to renew its creaking $44 billion IMF program.
The government has agreed to an extended currency swap with China to help cover some of its costs, and has had to delay some payments to key trading partners such as Brazil.
RECESSION
Latin America’s third-largest economy is on track to shrink 2% this year, according to the latest central bank analyst survey, partly due to the impact of the recent drought that halved corn and soy crops.
Coupled with triple-digit inflation, it is likely to exacerbate poverty levels, with two-fifths of people already living below the poverty line, as wages and savings are eroded.
SILVER LINE?
Argentina, rich in grains, shale gas and lithium, could see a boost next year as better rains help harvests, a new gas pipeline reduces reliance on costly imports and demand rises for the lithium needed for electric car batteries.
Soy and corn are expected to have much stronger harvests, which will bring in much-needed foreign exchange.
“The harvest will help bring a greater income stream to the economy, as will the greater production of (shale oil formation) Vaca Muerta,” said Eugenio Marí, chief economist at the Libertad y Progreso Foundation.
Reporting by Hernan Nessi and Eliana Raszewski; Editing by Adam Jourdan, Daniel Wallis and Chris Reese
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