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Politics & Religion / WSJ: Milei's Achilles Heel
« Last post by Crafty_Dog on April 28, 2024, 03:44:48 PM »Javier Milei’s Achilles’ Heel
Without a credible dollarization strategy, Argentina’s president is at risk of failure.
Mary Anastasia O’Grady
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Mary Anastasia O’Grady
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April 28, 2024 3:58 pm ET
Argentina’s central bank will soon issue a 20,000-peso note, replacing the 2,000-peso note as the largest-denomination bill in circulation. At the official exchange rate, the new bill will be worth around $23. A 50,000-peso note is expected to follow.
This is no doubt painful for Argentines who voted for President Javier Milei in October because he pledged to dollarize the economy and close the central bank. Adding insult to injury, the central bank said it plans to decorate the new 20,000-peso note with an image of Juan Bautista Alberdi, father of Argentine classical liberalism and a staunch advocate of sound money. Alberdi died in 1884, but if he were still around I’m betting he’d sue for defamation.
It’s been four months since Mr. Milei took the oath of office, promising to free the nation from the strictures of Peronism. With a passion for liberty and irreverence for the establishment, he’s generated excitement among long-suffering Argentines tired of a century of government modeled on Mussolini’s Italy. He rails against socialism and endorses Western civilization. He backs Israel, a welcome foreign policy in a region that increasingly bows to Tehran.
Yet Mr. Milei’s talk of freedom is at odds with exchange, capital, and lingering price controls. Monthly inflation for March was below market expectations but still high at 11%. “On an annual basis, headline inflation accelerated to 287.9% [year over year],” Goldman Sachs reported April 12. “Core inflation printed at a lower but still high 9.4% [month over month] in March, reaching 300.0% [year over year].”
In a speech to the nation last week the president boasted that in the first quarter of this year his government achieved a budget surplus—not seen since 2008—of around $309 million, or roughly 0.2% of gross domestic product. This austerity is a main driver of the drop in inflation, down from a monthly print of 25% in December. But it isn’t enough. Inflation expectations remain high. The International Monetary Fund’s inflation forecast for 2024 is 150%, and 45% for 2025.
Nor are the cuts sustainable. They’ve been achieved by denying pensioners inflation adjustments, shutting down public works and putting the kibosh on payments to utilities. As Goldman Sachs explained, this “adjustment” along with “a drag on real economic activity impacted by the erosion of household disposable income should contain price pressures.” In other words, progress on inflation is expected to come from recession and cutting into the bone of government services.
There’s method to this madness since elevated inflation reduces the value of government debt—now at 80% of GDP—in dollars. But the pernicious effects of such a strategy on investment, economic growth and development are undeniable. One question is how long consumers and wage earners will support Mr. Milei if currency uncertainty discourages badly needed capital inflows and there is a persistent decline of real income and purchasing power.
By adopting a credible dollarization strategy immediately, Mr. Milei could stop inflation in its tracks. Instead he’s first trying to address fiscal and regulatory distortions.
A December executive “decree of necessity and urgency” aimed at liberalizing key parts of the economy has scored some points. In a tweet last week, Argentine economist Federico Sturzenegger noted a new open-skies agreement with Chile and authorization for online purchases and home delivery of medications. Yet an appeals court declared the crucial labor reforms in the decree unconstitutional.
The matter now goes to the Supreme Court. But in any case, Mr. Milei won’t be able to restore Alberdi’s Argentina by decree. This is why in February he submitted to Congress a mega-reform bill named the Law of Bases and Starting Points for the Freedom of Argentines. It would have cleared the way to sell 40 state-owned companies; enact political, judicial, education and tax reforms; and open public infrastructure to private investment. It was just what Argentina needs.
But his Liberty Advances party is a minority in Congress, and that made the bill politically impossible in its entirety. When Congress countered with a diluted version of the law, a miffed Mr. Milei pulled it.
Now he’s left with only untenable fiscal cuts and his use of inflation to reduce the dollar value of Argentine debt, both of which threaten to induce many months of pain and scare away investors. After a benchmark interest rate cut last week, Goldman Sachs noted that “the central bank has opted to deepen financial repression as a tool to clean its balance sheet.” To the extent it’s working, it’s also eating away at household disposable income, the investment bank said.
None of this is good for the visionary president, who needs to break the stranglehold of special interests in a dysfunctional legislature and needs popular support to do it. If he doesn’t change course, he could easily turn out to be one more mediocre Argentine president—or worse. Mr. Milei’s government needs stable money, and fast.
Write to O’Grady@wsj.com.
Without a credible dollarization strategy, Argentina’s president is at risk of failure.
Mary Anastasia O’Grady
By
Mary Anastasia O’Grady
Follow
April 28, 2024 3:58 pm ET
Argentina’s central bank will soon issue a 20,000-peso note, replacing the 2,000-peso note as the largest-denomination bill in circulation. At the official exchange rate, the new bill will be worth around $23. A 50,000-peso note is expected to follow.
This is no doubt painful for Argentines who voted for President Javier Milei in October because he pledged to dollarize the economy and close the central bank. Adding insult to injury, the central bank said it plans to decorate the new 20,000-peso note with an image of Juan Bautista Alberdi, father of Argentine classical liberalism and a staunch advocate of sound money. Alberdi died in 1884, but if he were still around I’m betting he’d sue for defamation.
It’s been four months since Mr. Milei took the oath of office, promising to free the nation from the strictures of Peronism. With a passion for liberty and irreverence for the establishment, he’s generated excitement among long-suffering Argentines tired of a century of government modeled on Mussolini’s Italy. He rails against socialism and endorses Western civilization. He backs Israel, a welcome foreign policy in a region that increasingly bows to Tehran.
Yet Mr. Milei’s talk of freedom is at odds with exchange, capital, and lingering price controls. Monthly inflation for March was below market expectations but still high at 11%. “On an annual basis, headline inflation accelerated to 287.9% [year over year],” Goldman Sachs reported April 12. “Core inflation printed at a lower but still high 9.4% [month over month] in March, reaching 300.0% [year over year].”
In a speech to the nation last week the president boasted that in the first quarter of this year his government achieved a budget surplus—not seen since 2008—of around $309 million, or roughly 0.2% of gross domestic product. This austerity is a main driver of the drop in inflation, down from a monthly print of 25% in December. But it isn’t enough. Inflation expectations remain high. The International Monetary Fund’s inflation forecast for 2024 is 150%, and 45% for 2025.
Nor are the cuts sustainable. They’ve been achieved by denying pensioners inflation adjustments, shutting down public works and putting the kibosh on payments to utilities. As Goldman Sachs explained, this “adjustment” along with “a drag on real economic activity impacted by the erosion of household disposable income should contain price pressures.” In other words, progress on inflation is expected to come from recession and cutting into the bone of government services.
There’s method to this madness since elevated inflation reduces the value of government debt—now at 80% of GDP—in dollars. But the pernicious effects of such a strategy on investment, economic growth and development are undeniable. One question is how long consumers and wage earners will support Mr. Milei if currency uncertainty discourages badly needed capital inflows and there is a persistent decline of real income and purchasing power.
By adopting a credible dollarization strategy immediately, Mr. Milei could stop inflation in its tracks. Instead he’s first trying to address fiscal and regulatory distortions.
A December executive “decree of necessity and urgency” aimed at liberalizing key parts of the economy has scored some points. In a tweet last week, Argentine economist Federico Sturzenegger noted a new open-skies agreement with Chile and authorization for online purchases and home delivery of medications. Yet an appeals court declared the crucial labor reforms in the decree unconstitutional.
The matter now goes to the Supreme Court. But in any case, Mr. Milei won’t be able to restore Alberdi’s Argentina by decree. This is why in February he submitted to Congress a mega-reform bill named the Law of Bases and Starting Points for the Freedom of Argentines. It would have cleared the way to sell 40 state-owned companies; enact political, judicial, education and tax reforms; and open public infrastructure to private investment. It was just what Argentina needs.
But his Liberty Advances party is a minority in Congress, and that made the bill politically impossible in its entirety. When Congress countered with a diluted version of the law, a miffed Mr. Milei pulled it.
Now he’s left with only untenable fiscal cuts and his use of inflation to reduce the dollar value of Argentine debt, both of which threaten to induce many months of pain and scare away investors. After a benchmark interest rate cut last week, Goldman Sachs noted that “the central bank has opted to deepen financial repression as a tool to clean its balance sheet.” To the extent it’s working, it’s also eating away at household disposable income, the investment bank said.
None of this is good for the visionary president, who needs to break the stranglehold of special interests in a dysfunctional legislature and needs popular support to do it. If he doesn’t change course, he could easily turn out to be one more mediocre Argentine president—or worse. Mr. Milei’s government needs stable money, and fast.
Write to O’Grady@wsj.com.