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Rgentina has elected a new president, and surprised the world...

Toussaintfreedom Says...

rgentina has elected a new president, and surprised the world with its choice: Javier Milei, the self-described anarcho-capitalist who only entered politics two years ago, is set to take office on December 10 after defeating Sergio Massa, the candidate of the ruling Peronist coalition, by an unexpectedly large twelve-point margin (56-44 percent).

Argentines clearly voted for change.

So what's next for a country that suffers from a record-high debt, annual inflation of 140 percent (and rising), and a 40 percent poverty rate?

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Fixing this will take an economic transition, and it won't be easy. In his concession speech, Massa, the minister of the economy in the current government, said that from now on, Milei would be solely responsible for the performance of the Argentine economy.

In his victory speech, Milei countered by reminding Massa and President Alberto Fernández that they are still in charge.

While it had been leaked that Massa would take a leave of absence until December 9, this did not materialize.

Understandably, nobody wants to take responsibility for Argentina's economy at the moment, because it is in shambles.

But it was Massa who during his tenure worsened the main cause of the problem: the fiscal deficit, which is financed via inflation and short-term-debt instruments called LELIQs that, in circular fashion, carry ever-increasing interest rates to reflect the surging inflation that they have helped create.

The danger posed by LELIQs, which, if they continue to accumulate, could drive Argentina into hyperinflation, is probably the most pressing problem that Milei has to tackle.

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Since Milei ran on a platform that included dollarization (abandoning the peso in favor of the U.S. dollar), the danger posed by snowballing LELIQ debt could be substantially increased by the rate at which the peso is switched into the dollar.

Repaying debt denominated in a hard, rather than a perpetually depreciating, currency is always a challenge.

Just how much of a challenge it will be in this case depends on the conversion rate. The "cheaper" the peso, the more expensive that now-dollar-denominated debt becomes.

Dollarization was conspicuously absent from Milei's victory speech, but the next day, the president-elect stated that the LELIQ problem needs to be dealt with before the economy can be dollarized.

If hyperinflation is to be staved off, Milei's economic team probably needs to raise around $30 billion in new debt. That may be difficult to accomplish against a backdrop of economic chaos and speculation that the country may default on its existing debt.

Repressed prices are another ticking bomb waiting to explode.

Of these, the price of the dollar is by far the most relevant.

Dollar futures for December were trading at 800 pesos per dollar, even though the official exchange rate is barely above 350 right now. Moving to a market rate would involve an abrupt 60 percent devaluation, which could have a significant effect on inflation.

But Massa is signaling that the outgoing government will not devalue the currency's official exchange rate, which means that the political cost of doing so will fall entirely on Milei.

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The economic transition will also be complicated by Milei's party's lack of support in the legislature.

Even though he won by an impressive majority, his La Libertad Avanza (LLA) coalition, which was formed in 2021, will hold only about 28 percent of seats in the Chamber of Deputies and about 26 percent of seats in the Senate.

Milei has an ambitious program -- for example, he wants to privatize state-owned enterprises such as the energy company YPF -- but how much will he be able to get through the legislature?

Even with the support of other parties on the right, there is no guarantee that Milei will be able to secure the majorities he needs to push his agenda through.

He may turn to emergency decrees as a means of skirting this problem, but many of these will likely be taken to court by the opposition.

So far, there are more questions than answers about the economic transition Milei has promised.

How high will inflation go?

Will Argentina make a fierce fiscal adjustment or take on new debt to avoid hyperinflation?

Will Milei be able to privatize as many state-owned companies as he wants?

Will he dollarize the economy, and, if so, what will be the exchange rate?

The only thing we can be sure of is that the road ahead will be b

Posted November 30 2023 at 4:36 PM

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