Argentina: Milei unveils wide-ranging reform plan in December
– Devaluation, deregulation, budget cuts and political reform are among the measures announced in December.
– The package will fuel short-term inflation but lays the foundation for a recovery from H2 2024.
– Congress could still water down or block many of the measures.
On 12 December, Economy Minister Luis Caputo announced a 5% of GDP fiscal adjustment and a partial realignment of the official exchange rate with the market rate. The fiscal adjustment included the reduction of subsidies, higher trade tariffs, halting new public works contracts, a drastic decrease in transfers to the provinces, and the halving of the number of ministries and secretariats. On the currency front, the official exchange rate was set at 800 pesos per U.S. dollar, implying a 54% devaluation of the peso.
The aforementioned measures were followed, in mid-December, by an emergency decree to reduce the weight of the state in the economy. Measures in the decree include initial steps towards the privatization of public enterprises, economic deregulation measures for a wide range of economic sectors, export facilitation, and the end of price controls.
Lastly, at end-December, the government submitted an “omnibus bill” to Congress. The bill has over 600 articles, covering the privatization of dozens of public companies, a fiscal amnesty, limits to public protests and the granting of emergency powers to the executive until at least 31 December 2025. This last proposal would allow President Milei to largely bypass Congress during this period, which would facilitate economic reforms but could also generate concerns over a lack of political checks and balances.
The measures are likely to result in higher inflation in the short term due to currency devaluation and cuts to subsidies. As a result, the Milei government’s shock therapy will probably result in a significant drop in economic activity in the first quarter of 2024.
Nevertheless, progress on macroeconomic reforms should lay the groundwork for a recovery of the Argentine economy starting in the second half of the year, which will be further supported by the agricultural sector recovering from last year’s devastating drought. The booming energy and mining sectors will further support the economic outlook. Moreover, inflation should fall sharply next year due to the narrowing of the public deficit.
Politically, the wide-ranging reform program will face opposition in Congress. The omnibus bill must be approved by Congress to come into effect, while the emergency decree is currently in effect but can still be struck down by Congress. Milei cannot count on an absolute majority in either chamber, even with the votes of Juntos por el Cambio, a center-right coalition that is likely to give him support. His coalition, La Libertad Avanza, holds only 15 percent of the seats in the lower house and less than 10 percent in the Senate. Moreover, Milei is also facing judicial opposition; in early January, a court annulled the labor reforms contained in December’s emergency decree. As a result, at least part of Milei’s reform program is unlikely to see the light of day.
Commenting on the likely effects of the reform plan, Andrés Pérez and Diego Ciongo, economists at Itaú Unibanco, stated:
“In our view, the announced measures of the stabilization plan begin to address the fiscal concerns yet will lead to higher inflation in the near term, reflecting the pass-through effect of the recent devaluation of the currency and the correction of energy, transport, and fuel tariffs, among others. On the positive side, further progress in the stabilization plan should eventually contribute to a resumption of growth towards the end of 2024, while inflation should eventually decelerate, and create room for appreciation of the currency in real terms over time.”