A radical policy platform:
Right-wing economist and serving MP Javier Milei won the most votes in Argentina’s primary elections, ahead of the traditional center-left and center-right coalitions, and thus has a real chance of clinching the presidency in the general elections set for October. Milei is proposing deep spending cuts, dollarization, privatizations and the removal of capital market and other controls on private-sector activity.
Short-term pain:
In the coming months, the upshot of his primary win will be higher inflation and a deeper economic downturn; the Central Bank devalued the peso by roughly a fifth and raised interest rates by 21 basis points in response to a market sell-off following election night. Among our panelists who have revised forecasts in recent days, Goldman Sachs now sees inflation ending this year at 140%, while JPMorgan projects 190%. Further interest rate hikes and currency weakening are expected by the end of 2023.
Longer-term uncertainty:
If Milei becomes the next president, a successful implementation of his dollarization plan could quickly cause inflation to subside and reduce the risk premium associated with Argentinian assets, supporting investment. Economic liberalization and the retreat of the heavy hand of the state could stoke firms’ animal spirits. However, the economy lacks dollars, and dollarization has never been attempted in an economy anywhere approaching Argentina’s size—Ecuador is currently the largest dollarized nation—raising concerns about feasibility. Plans to drastically cut public spending and lift subsidies could spur civil unrest and raise unemployment if new private-sector jobs are not quick to arrive. And then there is the political arithmetic: Only half of lower house and a third of upper house deputies are up for election in October. Given Milei currently has virtually no parliamentary representation, this will force him to negotiate any economic reforms with the center-right Together for Change coalition, further clouding visibility regarding future policy.
The outlook:
Our Consensus is currently for the economy to contract this year and next, and for inflation to remain in triple digits until 2025. The primary result has darkened an already-bleak economic panorama. One can only hope that the election of a new president will finally lead to a reversal in fortunes.
Insight from our analysts
On inflation prospects, Goldman Sachs analysts said:
“We now expect headline inflation to end the year at 140%, 10pp above our previous forecast. Despite an extensive set of price controls in the economy, inflation dynamics continue to worsen and exchange rate pressures remain intense. Policy credibility is weak, the government’s attempts to contain price increases have been unsuccessful, inflation expectations remain unanchored, and international reserves stand at critical level.”
On the political panorama, EIU analysts said:
“Looking ahead to October, Mr Milei is carrying strong momentum. His combative, anti-establishment rhetoric speaks to voters’ frustrations with the failure of established political parties to address persistent economic volatility. However, a win for Mr Milei is not guaranteed. For one thing, voters may be less willing to plump for a radical right-wing candidate in the first round than they were in the primary. For another, Ms Bullrich, having won the JC primary, can credibly challenge Mr Milei given her own right-wing credentials, while also moderating her position enough to scoop up the votes of undecided centrists.”
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