Milei prepares shock therapy to cure Argentina’s sickly economy

Argentina’s voters have taken a leap into the unknown after electing Javier Milei, a radical libertarian outsider, as president in the hope that his promise of shock therapy can cure its sickly economy.

Rightwing populists in the shape of Donald Trump and Italian premier Giorgia Meloni were quick to offer congratulations to Milei, the mop-haired television economist who beat economy minister Sergio Massa by a convincing 11 percentage points. But Argentines were already worrying about how the flamboyant first-term legislator might govern the deeply divided South American nation without a congressional majority.

Milei pledged in a burst of radio interviews on Monday to privatise national oil company YPF, state television and radio. “Everything which can be in private sector hands will be in private sector hands,” he vowed. He promised to visit the US and Israel in the three weeks before his inauguration, saying it would be a “spiritual” experience.

His flagship policies are taking a “chainsaw” to a bloated state and dollarising the economy, but Milei has limited room for manoeuvre as he inherits a dire financial situation. Argentina’s foreign exchange reserves are exhausted, annual inflation hit 142.7 per cent in October and Massa has emptied the treasury for a pre-election spending spree.

A messy transition looms: the pair have already clashed after Milei angrily rejected Massa’s attempts to assign him immediate responsibility for guaranteeing stability. Alberto Fernández, the incumbent president, has all but vanished during the election campaign, as the ruling Peronists attempted to put distance between Massa and his unpopular boss.

One of Milei’s first tasks will be to prepare a new 2024 budget to send to congress after he takes office on December 10. Analysts expect it to include large spending cuts after Milei, who repeated in his victory speech that there was “no room for gradualism”. The president-elect will also need to start talking to the IMF, to whom Argentina owes more money than any other country, about restructuring its troubled $44bn loan programme.

“Everything points to this being the roughest transition in at least a decade,” said Fabio Rodríguez, associate director of M&R Asociados, a consultancy in Buenos Aires. “There are many, many problems, and all of them are urgent.”

President-elect Javier Milei wants to close the National Bank of Argentina, the country’s central bank © Marcos Brindicci/Getty Images

Milei’s insurgent campaign — waged largely over social media and based on an iconoclastic programme of burning down the central bank and doing away with the country’s political “caste” — resembled those of his ideological soulmates Trump and Jair Bolsonaro, the former presidents of the US and Brazil respectively.

But Milei is likely to face a harder struggle in congress to pass legislation than either of his fellow populists. His La Libertad Avanza (LLA) coalition, founded only two years ago, has fewer than 40 of the 257 seats in the lower house and seven of the 72 in the senate. None of Argentina’s 23 powerful regional governors are from his party.

Former centre-right president Mauricio Macri has formed an alliance with Milei but even if all of the lawmakers in his Pro party backed LLA’s proposals, he would still have less than a third of the lower house and a fifth of the senate.

Milei has not yet confirmed who his economy minister will be, saying that after Massa’s shenanigans, giving a name now would amount to putting his most important minister “in the electric chair”. But he will be under pressure to unveil his choice soon: names under consideration include Macri’s former central bank head Federico Sturzenegger and former finance minister Luis Caputo, according to local media.

Milei speaks to supporters outside his campaign headquarters in Buenos Aires after winning the run-off election on Sunday © Matias Delacroix/AP

“A lot will depend on the dynamic between Milei’s supporters, who are inspired by his most radical rhetoric . . . and the so-called adults in the room, people tied to Macri and [defeated centre-right candidate Patricia] Bullrich,” said Oliver Stuenkel, international relations professor at the Getúlio Vargas Foundation in São Paulo. The latter group saw Milei as a “useful vessel to get their policies through but who think they can control him and prevent him from implementing his most radical ideas”.

Stuenkel added: “Milei doesn’t have the allies to staff a whole administration so he will depend on technocrats, which he denounced before the run-off vote as the deep state.”

Still, Milei’s relatively strong mandate — he won more votes than any president since Argentina’s return to democracy in 1983 — might allow him to pass rapid spending cuts in an initial honeymoon period, said Rodríguez.

“There is a custom in Argentina for parties to not block the incoming president’s first budget,” he said, adding that Milei could alternatively take the budget submitted to congress by Massa, and modify parts of it by decree without legislative support.

Sergio Massa addresses supporters in Buenos Aires on Sunday. The economy minister lost the run-off by 11 points © Adriano Machado/Reuters

Another urgent concern is a ballooning pile of government debt with local creditors. It now costs 2.5tn pesos to service the debt in monthly interest payments — the equivalent of the fiscal deficit Argentina accumulated in the past eight months, according to Marina Dal Poggetto, executive director of EcoGo, a consultancy. Massa paid the bills by printing money — a measure that Milei has ruled out.

“The situation means there will be an economic shock; the question is whether it will be an orderly or a disorderly shock,” she said.

After what is likely to be the briefest of honeymoons, the Peronists will be waiting to pounce on any mis-step by Milei. The movement’s control of labour groups and ability to bring large crowds on to the streets for protests threaten turbulent periods for the inexperienced new president.

Analysts see an even tougher road for Milei’s other flagship policy: the replacement of the peso with the dollar and the closure of Argentina’s central bank.

Milei’s team has said it would need about $40bn to dollarise the economy but Argentina’s hard currency reserves are negligible, and the country has no access to international credit. LLA is also far off the majority it would need in congress to pass a dollarisation law. 

“It looks like the idea of dollarisation will be at least put off, and for now Milei will focus on a more traditional stabilisation plan,” said Amilcar Collante, an economist at La Plata National university. “That will mean attempting to unify the exchange rate.”

Most economists believe a big devaluation in the officially pegged exchange rate is inevitable, but Milei said an immediate elimination of currency controls was impossible.

“First, we have to deal with [the debts to local creditors]. If you don’t do that, and you get rid of controls, you’ll have hyperinflation,” he said on Monday. “We have a very clear plan on how to solve the problem.” He did not give any details.

Much remained unclear about how Milei would go about pursuing his agenda, Stuenkel said.

“A lot has to do with his personal leadership capacity, his interest in the minutiae of policy — which we don’t really know about. He was not a particularly productive congressman. He didn’t make a lot of friends, so he may leave the dealmaking to others.”

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