Milei update

The shock therapy administered by Milei and his economy czar Luis Caputo right after the Dec. 10 inauguration is showing results. In a severely recessionary context, inflation is slowing down (February prices rose 13.2% in monthly terms compared with 25.5% in December) while foreign reserves grew by more than $7 billion despite debt repayments. Deposits on local dollar-denominated bank accounts have also recovered. Last week, Argentina’s sovereign spread (a measure of country risk) dropped to the lowest in more than two years and the nation has received the enthusiastic backing of the International Monetary Fund, its single largest creditor.

The exchange rate — historically the Argentine economy’s key indicator — has recently appreciated in parallel markets and now trades at just 15%-20% over the official peso, opening the door for authorities to consider unifying the currency market. As local economists have argued, it’s time to start dismantling the byzantine currency controls that have long strangled Argentina.

The flipside of the government’s deep spending cuts, however, is a near-collapse in economic activity, with industrial production falling more than 12% year-on-year in January and construction retreating even more.

And:

At the same time, the parallel peso’s appreciation in a context of high inflation is leading to a loss of competitiveness, with Argentina fast becoming expensive when measured in dollars. The result adds to speculation that a new devaluation will soon be unavoidable, reversing gains in the fight on inflation. “Our base scenario considers a correction of the exchange framework in May,” Buenos Aires-based consultant Equilibra said in a recent report. Monday night’s measures by the country’s central bank can be seen as an attempt to tame this appreciation.

The government’s gamble is that, by the second quarter, a strong crop from Argentina’s high-powered farmlands spurs a rebound in activity that helps contain some of the social discontent produced by the measures.

Here is more from Juan Pablo Spinetto at Bloomberg.  And from the FT:

Argentina’s Senate has rejected President Javier Milei’s sweeping emergency decree to deregulate the economy, in a major blow to the libertarian leader and his attempt to deliver reforms for the crisis-stricken country. Senators voted 42 to 25 to reject the decree, with four abstentions. Issued in December it modifies or eliminates more than 300 regulations affecting the housing rental market, food retailers, air travel, land ownership, and more.

So further progress on the libertarian front may be tough.  Also from the piece:

“This is a worry for the market because the president is on the verge of losing . . . the only set of substantial economic reforms he has been able to introduce so far,” he said. Milei already opted to withdraw the other plank of his legislative agenda — a multipronged omnibus bill aiming to overhaul the Argentine state — from the floor of the lower house last month after lawmakers rejected several key articles.

Things could be better.