When Javier Milei assumed the presidency of Argentina in December 2023, inflation, which already reached almost 13% monthly, doubled.
Meanwhile, the “blue” dollar – as Argentines call the free or market dollar, which is the main price reference in this country – began to climb, climbing 25% by the end of January.
While the man who had just entered the political arena just three years earlier carried out “the biggest adjustment in human history” (as he described it himself), cutting public spending by about one thirdThe alarm bells began to sound.
The most doomsayers (and opponents) predicted that the president would not remain in office at the end of the year and revived the traumas of 2001-2002, when the country suffered one of its worst economic, political and social explosions, and there were five presidents in just one year. two weeks.
Others warned that a new hyperinflation was coming, like that of 1989, when prices rose by 5,000% annually.
Even many voters who were part of the 56% of the electorate that had elected Milei ahead of the then Peronist Minister of Economy, Sergio Massa, in the second electoral round they prepared for the possibility that the “blue” would rise without pause, after the brand new government of La Libertad Avanza (LLA) doubled the value of the dollar official (devaluing the peso by 50%), after electoral promises to dollarize the economy.
However, ten months after the inauguration of Milei – the first economist to become president of Argentina and the first libertarian politician to lead a nation – none of those pessimistic scenarios has been fulfilled.
On the contrary: inflation has been reduced to 3.5% monthlyits lowest figure in almost three years.
And the parallel dollar, which climbed to a record of 1,500 pesos in July, is today at levels similar to January.
Meanwhile, although it lost about 10 popularity points -although it is still above 40%-, Milei has consolidated its powerachieving important legislative victories despite having a small minority in Parliament and not having any governor from their political group.
“I voted for him because I wanted change and he is achieving it,” says Diego, 56, who walks dogs in Buenos Aires.
“Although they have been very hard months, especially for my old man [padre]who is retired, with inflation and the dollar low we are better off,” he tells BBC Mundo.
Despite this, there is no doubt that Argentina is going through a very difficult time: according to the latest official figures, in the first half of the year it registered its worst jump out of poverty in two decadeswith more than half of the population poor (almost 53%), including almost 7 out of 10 children.
Besides, consumption plummeted and the Gross Domestic Product (GDP), the index that measures economic activity, fell 3.4% compared to the first half of the previous year. Both the World Bank and the International Monetary Fund agree that Argentina will be the Latin American economy with the greatest contraction economic this year.
However, it cannot be refuted that, at least for now, Milei is keeping his promise to clean up the macroeconomy, lower inflation and stabilize the dollar.
“We are successfully leaving hell,” the president announced in a recent interview with the LN+ news channel.
At BBC Mundo we explain how he is achieving it (and why not everyone believes his strategy is successful).
The Milei plan
“To understand how Milei lowered inflation, what you essentially have to understand is the origin of inflation,” economist Miguel Boggiano, one of the members of the Council of Economic Advisors of the Argentine government, explained to BBC Mundo.
“In Argentina, the explanation is relatively simple: as the different governments have spent more than they collect, what ended up happening was that This excess spending ended up being financed with the printing of paper moneythat is, with monetary emission, because no one lends money to Argentina anymore.”
Boggiano assures that “the problem was getting worse” because, in addition to printing money for the Treasury, the Central Bank also began to give it loans, which left both organizations in debt.
“The Central Bank knew that with all those pesos it gave to the Treasury it was going to generate inflation, because there was an excess of pesos that the public did not demand and then it was going to go to the dollar or to prices.”
To prevent this from happening, he explained, the Central created a mechanism to absorb an important part of that money: the so-called remunerated liabilities, short-term debt that was contracted with the banks.
That debt it was accumulating.
When Milei took office, the Treasury’s deficit – or red – was equivalent to 4.6% of GDP. But that of the Central Bank was double, due to the “ball” of interest that this short-term debt had generated.
To address the Treasury problem, Milei went straight to the root: wielding the metaphorical chainsaw which he used as a symbol during his campaign, wiped out a third of public spending in one go.
Thus, from his first month in office, he managed to reduce emissions – the main cause of inflation – and went from deficit to fiscal surplus (more income than expenses), something that Argentina had only achieved a handful of times in the last century.
To resolve the Central Bank’s debt (and cut the emission it generated) it resorted to another device: the blender, says Boggiano.
“It lowered the interest rate paid by remunerated liabilities and also devalued the peso, correcting the official exchange rate that had been delayed and bringing it almost to the same level as the market exchange rate.”
“That produced an accommodation of relative prices that meant a jump in inflation, which was higher than interest who paid for that debt. In this way, it liquefied the remunerated liabilities, leaving them with negative real interest rates,” explains the advisor.
Speaking before a business forum last week, Milei was proud of her strategy: “No one knew how to solve it and we solved it in six months. Something that seemed impossible, we made it possible“, he highlighted.
Sustainability
Although many of his critics claimed that it would be impossible to maintain the surplusbecause it would require continuing to postpone payments that eventually had to be made and freezing public spending at historic lows, the truth is that the libertarian government He has maintained it in his first nine months of government.
It has even managed to have a surplus after paying interest on the public debt, something unprecedented in this country and considered key to balancing the accounts.
However, some accuse the president and the Minister of Economy, Luis Caputo, of carrying out financial gymnastics that simply “hides” the deficit.
A former advisor to Milei, the economist Carlos Rodríguez, who was Secretary of Economic Policy during the government of Carlos Menem, warned on his X account (former Twitter) that the government would not have a surplus if it were not financed with Treasury bills. known as Lecap and LEFI, which allow the payment of interest to be deferred since these are paid, along with the capital, only when the debt title matures.
According to Rodríguez, this paid debt that is accumulating “does not appear in the Treasury’s financial deficit or in the quasifical (official name of the Central Bank deficit). Only public debt increases“.
“As if by magic, the quasi-fiscal deficit disappeared and Milei instantly reduced the State deficit by several points of GDP. That is simply a blackmailed (deception). The deficit continues. They don’t fool anyone”They only lose credibility,” he wrote.
Along the same lines, this Monday former president Cristina Fernández de Kirchner also denounced through X that Milei, who said during the campaign that she was going to close the Central Bank, ended up “passing its liabilities to the Argentine State with the LEFI and the Lecaps that are generating monthly interests of more than 2 trillion pesos (US$2,000 million) and building a ball that, when it explodes, it is better not to be around“.
Beyond this debate, Milei appears confident that by maintaining his “zero deficit” policy he will be able to reduce inflation, which was one of his main electoral promises.
In his 2025 Budget bill, which he presented in September, he estimated that this year inflation will close at 104.4%, half of what it was in 2023 (211.4%). And next year will collapse at 18.3% annually.
The market is a little less optimistic, but agrees that there will be a significant slowdown: the Central Bank’s latest Market Expectations Survey projected that in 2024 inflation will be 123.6%, a little lower than what the IMF estimated (140%).
“And if this time it turns out well???”, it was hoped in X Mariano – a lawyer “with the irrepressible desire to see a prosperous Argentina” – in the midst of the many posts that question whether the government’s goals are realistic.
Unlike inflation, which has progressively decreased from 20.6% in January to 3.5% in September, the parallel dollar, which reflects the market’s confidence in the government and is an unconditional reference in this country, has had a more erratic route.
When Milei took over, it was worth $1,000, a figure that increased 25% by the end of January ($1,250). Although it fell again, and remained close to $1,000 again between March and May, from then on an escalation began that generated concern among Argentines, who know that the value of the “blue” usually translates quickly into prices.
By July, the greenback had reached its highest figure: $1,500about 50% more than the value of the official dollar, which is regulated by the government and appreciates at a fixed rate of 2% monthly, as an “anchor” against inflation.
This led to new alarm signals over fears that it would put pressure on prices.
However, since then the “blue” has returned to January levelssomething considered a victory for the libertarian government.
“The dollar goes down, expenses don’t go up, the garage rent doesn’t go up, my salary goes up. THANK YOU MILEI,” wrote Matías, a Boca Juniors fan and government sympathizer, in X.
But what did Milei do to contain the dollar?
There are those who consider that a no minor factor to explain the fall in the exchange rate has been the “money laundering” carried out by the government and that allows you to declare up to US$100,000 not registered without penalties or additional taxes (larger figures pay between 5% and 15%).
This has generated a largest supply of dollarswhich contributes to reducing its value.
However, the government denies that what is being experienced is a “exchange summer”, caused by money laundering, and affirms that the decline in the dollar is part of its plan.
The president himself explained it in his speech before the businessmen and women gathered at the forum of the Institute for Business Development of Argentina (IDEA), on October 18.
“Faced with a speculative attack where the dollar was trading at $1,500 and we were told that the following week it would go to $2,000, and so on, we decided to change the monetary scheme and go directly to zero emission,” he stated.
“It seems that it also worked and something happened that never happened in Argentina, which is that the $1,500 dollar fell to $1,100. So That which also seemed impossible, we also made it possible“He boasted.
Boggiano explained the strategy in more detail to BBC Mundo.
“At the beginning of President Milei’s administration, the Central Bank was issuing pesos to buy dollars and rebuild its reserves (which the government inherited with a negative balance of more than US$11,000 million),” he noted.
“Two or three months ago the Central Bank decided directly not to issue more pesos to buy dollars, with which there is no emission for any reason“.
“And since, in addition, the Treasury has a fiscal surplus – that is, it spends less than it collects in taxes – the Treasury itself is absorbing pesos from the economy. The result is that there are no more pesos and that is causing the dollar to go down“he stated.
Argentina expensive in dollars
The paradox of Milei’s strategy is that someone who spoke of dollarizing the economy and during his campaign He called the Argentine peso “excrement” ha appreciated its value so much so that now the country has become expensive in dollars.
“If the exchange rate remained where it is today, in the first 12 months of the year Argentina would have 104%-105% inflation in dollars“said another former partner and now critic of the president, Diego Giacomini.
“It means that, if at the beginning of the year, when Milei went up, you needed 100 dollars to pay for electricity, at the end of the year you will need between 200 and 210 dollars to pay for electricity,” he explained during a recent interview with Radio con vos.
According to the economist “it is a type of exchange that it doesn’t work for you neither to those who produce domestically for the domestic market nor to those who export. So, activity level is doomed to be bad“.
“That it will have to be corrected at some point with exchange rate jump and later inflation acceleration“, he diagnosed.
Some Argentines share his pessimism. “We are expensive in dollars because the value of the dollar is backward because they have trampled it!!! I’ve already seen this movie and I already know the ending: 2001, does that sound familiar to you?!!!”wrote tweeter Jean Valjean.
However, Milei has ruled out a new devaluation and stated that it will maintain its strategy of appreciating the official dollar by 2% each month, even though this has left its value behind inflation.
Economy Minister Caputo pointed out that the government’s plan is to eventually the official dollar and the “blue” convergean important step before being able lift capital controls (here nicknamed “traps”) that limit access to the US banknote in this country.
And also something that must precede an eventual dollarization, which continues to be part of the official plans, through free “currency competition.”
Meanwhile, the government dismisses the concerns of those who warn that, beyond the good financial news, the “real economy” does not take off.
He points out that, although the year-on-year comparisons of economic activity are negative, if we compare month by month we see that the trend is positivea change that is already beginning to be noticed in some sectors.
“From now on only good news comes“Milei repeats in his speeches and interviews.
Their optimism is shared by the World Bank and the IMF, which have estimated that in 2025 Argentina will grow 5%going from being the Latin American economy with the greatest economic contraction to the fastest growing.
We will have to wait to see if this economic rebound is a springboard towards a more prosperous future, one that manages to improve the lives of some of the 25 million poor people that the country has today, as Milei promises, or if Argentina once again becomes trapped in another debt spiral, as its adversaries warn.
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