Argentina’s new economy minister, Luis Caputo, announced a series of drastic measures aimed at addressing the country’s worst economic crisis in decades. This includes devaluing the official peso exchange rate by over 50% to 800 per dollar, cutting energy subsidies, canceling tenders of public works, and reducing the size of the government. Caputo stated that while these measures may be painful in the short-term, they are necessary to address the fiscal deficit and bring down inflation.
Caputo emphasized that the objective of the plan is to avoid an economic catastrophe and restore stability to the economy. The country’s foreign exchange and grains markets were in a state of anticipation as traders awaited the details of the new government’s economic plan. Some banks had already weakened their FX rate to 700 in anticipation of a sharp devaluation.
Strict capital controls since 2019 have artificially kept the currency strong, leading to a wide gap between the official exchange rate of 366 per dollar and parallel rates as high as 1,000 per dollar. The situation has resulted in high poverty rates and annualized inflation of 200%, raising concerns about hyperinflation.
President Javier Milei, who had campaigned with promises of major spending cuts, has plans to gradually eliminate export tariffs, a move that has long been sought by farmers. The grains sector is expected to meet with the government to discuss these measures.
The tough fiscal rhetoric of Milei has been positively received by markets, with the local S&P Merval stock index reaching a new record high on Tuesday and sovereign bonds increasing by over 2%. However, the challenge lies in whether Milei can implement the necessary cuts without causing turmoil and unrest in the country.
Fitch Ratings has warned that while the adjustment will be painful, there are economic, political, and social risks associated with the path forward. Milei’s party has limited representation in the legislature and no provincial governorships, making alliances with influential parties and power-brokers essential.
The central bank, under new president Santiago Bausili, has announced plans to undo “transition” checks on FX trades and the government has already started cutting the size of government, reducing the number of ministries to nine and making sharp reductions in the number of secretariats and departments.
(Reporting by Jorge Otaola and Walter Bianchi; Editing by Adam Jourdan, Frances Kerry, Chizu Nomiyama, David Evans and David Gregorio)
