From London’s CNN –Thank you for reading this post, don't forget to subscribe!
Can Javier Miley, who has won Argentina’s presidential election on Sunday and plans to reshape South America’s second-largest economy and drop the preference for the US dollar over the peso currency, actually succeed in his radical plans?
The La Libertad Avanza coalition, headed by Miley, secured victory in the election with approximately 56% of the vote, defeating the incumbent centre-left Peronist party and its candidate, Economy Minister Sergio Massa.
Miley, in his victory speech on Sunday, did not provide many details about the economic policies he intends to pursue upon assuming office on Dec. 10. However, the self-proclaimed “anarcho-capitalist” – who used a chainsaw during the campaign to symbolize his intentions of reducing state spending – has pledged to implement “drastic” reforms.
Asserting that “The decadence model is over, there’s no turning back,” Miley recognized the challenges ahead and remarked, “Today we have ended the destructive model of the current state, which benefits only a few while harming the majority of Argentines.”
Acknowledging the prevailing issues such as inflation, economic stagnation, lack of genuine employment, insecurity, poverty, and destitution, he highlighted the gravity of these problems.
Miley’s victory has been well-received by the financial markets, signifying a potential shift in economic policy. Miley is dealing with inflation that has soared above 140%, dwindling foreign exchange reserves, and the looming threat of another painful recession.
Argentine dollar bonds saw an increase on Monday, and the shares of several Argentine companies listed in New York recorded a surge. State-owned energy company YPF witnessed a 40% surge, while Banco Macro (BMA) and Grupo Financiero Galicia (GGAL) rose by 20% each.
Although Argentina’s financial markets were closed on Monday for a local holiday, the peso experienced a slight weakening to about 353.58 against the US dollar in partial trading. The currency’s value has plummeted by 875% against the dollar over the last five years.
Miley has pledged to eliminate currency controls and import restrictions, actions that analysts predict will further strain the peso and drive its value closer to the levels at which it is traded in various informal markets.
According to Bruno Gennari, an Argentina specialist at fixed income broker dealer KNG Securities, the peso was trading at $1,009 against the dollar on crypto exchanges on Monday, significantly weaker than the rates of $869 and $975 observed on Friday.
As a former economist and TV pundit running for president on the promise to “break the status quo,” Miley has advocated for a prominent campaign to “dollarize” Argentina as a solution to the country’s hyperinflation issue.
This proposed move, albeit implemented by other countries, none as large as Argentina, Latin America’s third-largest economy after Brazil and Mexico, entails abandoning the peso and adopting the US dollar as the country’s currency. This effectively shifts control of monetary policy from the country’s central bank to the US Federal Reserve while also depriving Argentina’s central bank of the ability to print money – a strategy often used to assist the country’s spendthrift government in avoiding defaulting on its debts, but which in turn results in uncontrolled price increases.
Analysts concur that dollarization could help combat inflation, but they doubt Miley has the requisite political or popular support to execute this agenda.
“We suspect that some of his more radical proposals — namely dollarization — may not materialize, given limited support in both Congress and the public,” opined William Jackson, chief emerging markets economist at Capital Economics, in a note on Monday.
He also expressed skepticism that while dollarization “would be a sure way to bring inflation under control, it would not be the solution to the country’s financial problems.”
As an indication of seeking support from centrist parties, Miley refrained from mentioning dollarization or prior plans to shut down the central bank in his victory speech.
Thierry Larose, portfolio manager at Vontobel Asset Management in Zurich, remarked, “That’s not going to happen in the near term,” citing not only political obstacles but also the precarious state of Argentina’s economy that renders it unable to generate dollars, and he described it as a “terrible idea” in conversation with CNN.
The present circumstances would lead to an exceptionally unfavorable conversion rate for the peso, significantly weakening the currency and potentially exacerbating the existing poverty, which government figures already estimate at around 40%.
“If you want to create dollars at a conversion rate that makes sense from a social and economic perspective, you need a minimum amount of international reserves,” asserted LaRose. Presently, the government’s foreign exchange reserves totaling more than $10 billion are at risk.
Nonetheless, the journey toward dollarization could benefit the economy, according to LaRose.
“For dollarization… you need to stabilize the economy: eliminate hyperinflation, rebuild foreign exchange reserves,” he stated, adding, “You need fiscal consolidation and ultimately you need access to capital markets.”
However, this seems like a distant prospect. The International Monetary Fund (IMF) has effectively restricted Argentina’s access to international markets while the country settles its debts. Following a historic bailout in 2018, Argentina owes the Washington, DC-based lender about $44 billion.
On Monday, the fund’s managing director Kristalina Georgieva congratulated Miley on his election victory and expressed the IMF’s anticipation to collaborate closely with Miley and his administration to devise and implement a robust plan for ensuring macroeconomic stability and promoting inclusive growth for all Argentines. This was communicated on X, the platform formerly known as Twitter.
Miley will require all available support. The World Bank anticipates a 2.5% contraction in Argentina’s economy in 2023, partly attributed to an overwhelming drought that is projected to result in a $20 billion loss in agricultural exports.
Furthermore, Capital Economics’ Jackson anticipates a shift in the IMF’s recent generosity towards Argentina. “It is uncertain whether debt restructuring will be pursued at this point, but we are moving in that direction,” he remarked.
Valentina Gonzalez, Stefano Pozzibon, Olesya Dmitrakova, and Reuters contributed to the reporting.