In eleven months the government of the ultra-liberal Javier Milei has found budget balance at the expense of the «shock adjustment”, with cuts in public spending.
Rating agency Fitch raised Argentina‘s long-term debt rating by one notch on Friday, from CC to CCC, but remains in the speculative category and does not attach any outlook to this rating. Raise your vote “reflects developments that have improved Fitch’s confidence in the authorities’ ability to effect upcoming repayments of foreign currency bonds without seeking any relief”the agency specifies in a press release.
“Dollar inflows triggered by a successful fiscal amnesty have begun to boost international reserves and are expected to continue to do so as they circulate through the financial system, supporting sovereign access to the dollar.”adds Fitch. The rating agency notes this however “however, the risks weigh on the ability to repay, (…) given the still uncertain prospects of a transition towards monetary and exchange rate policies aimed at guaranteeing a lasting improvement in reserves and a recovery of access to walking”.
“Shock adaptation”
In eleven months the government of the ultra-liberal Javier Milei has found budget balance at the expense of the “damper adjustment”with cuts in public spending. Collateral victims: purchasing power and economic activity, which threw Argentina into recession where, according to official data, poverty affected 52% of the population in the first half of the year.
Having entered recession under the combined impact of inflation and austerity, Argentina’s economy is expected to contract by 3.5% in 2024, before an estimated recovery of +5% in 2025, according to the IMF. In October, inflation continued the deceleration observed for several months, but it was still 193% year-on-year. Just six months after the 10,000 peso note, Argentina even launched a 20,000 peso note, now the largest denomination in circulation. Javier Milei’s Argentina, a declared ally of American president-elect Donald Trump whose climate skepticism he shares, withdrew its delegation from COP29, which is taking place in Baku (Azerbaijan), on Thursday.
What are the potential social impacts of Javier Milei’s austerity measures on Argentina’s vulnerable populations?
Interview with Economic Expert on Argentina’s Economic Landscape Under Javier Milei
Interviewer (Time.news Editor): Welcome, Dr. Maria Gonzalez. Thank you for joining us today to discuss Argentina’s current economic situation under President Javier Milei. The recent budget balancing efforts and cuts in public spending have been significant. What’s your initial assessment of Milei’s approach to fiscal policy?
Dr. Maria Gonzalez: Thank you for having me. Javier Milei’s ultra-liberal approach has undoubtedly stirred up the economic landscape in Argentina. The ”shock adjustment” measures he has implemented to balance the budget, primarily by slashing public spending, reflect a drastic shift aimed at stabilizing the economy. While these measures are intended to restore fiscal discipline, they can also lead to increased social unrest and public dissatisfaction if not managed carefully.
Interviewer: That’s a very crucial point. Speaking of public reaction, Milei’s policies have been polarized. On one hand, you’ve got supporters who believe in the need for austere measures, and on the other hand, critics who argue that such cuts disproportionately affect the most vulnerable. How should the government balance these competing interests?
Dr. Maria Gonzalez: Balancing these interests is indeed a tightrope walk. Milei’s government must engage with civil society and ensure that the cuts do not lead to humanitarian crises. A potential strategy could involve targeted welfare programs or unconditional cash transfers to support the most vulnerable populations while still pursuing fiscal responsibility. Transparency in budget allocation and public communication will also be crucial to prepare the public for necessary adjustments.
Interviewer: Recently, Fitch Ratings upgraded Argentina’s long-term debt rating from CC to CCC, signaling improved confidence. What factors do you think contributed to this slight uptick, especially considering the speculative nature of the rating?
Dr. Maria Gonzalez: The upgrade from Fitch reflects a cautious optimism. It’s partly due to measures like the successful fiscal amnesty that has attracted dollar inflows, significantly boosting international reserves. Fitch seems to acknowledge Milei’s efforts to stabilize the economy and the fact that the government could meet its foreign currency obligations without resorting to a relief package. However, the lack of an outlook attached to this rating indicates that risks remain high, especially due to the uncertainty surrounding the sustainability of these fiscal measures.
Interviewer: Interesting. You mentioned dollar inflows generated by the fiscal amnesty. How do these inflows potentially affect Argentina’s economic recovery and financial system stability?
Dr. Maria Gonzalez: The dollar inflows can have a positive ripple effect throughout the financial system. As these funds circulate, they bolster international reserves and facilitate sovereign access to foreign currency, which has been a significant challenge for Argentina. Increased reserves can enhance confidence in the economy, stabilize the peso, and reduce inflationary pressures over time. However, it’s crucial to ensure that these inflows are utilized efficiently to foster long-term economic growth rather than just being a stopgap measure.
Interviewer: As we look ahead, what are the key challenges Milei’s government will face in maintaining this newfound fiscal balance and confidence from rating agencies?
Dr. Maria Gonzalez: The major challenges will include managing public dissent arising from austerity measures, addressing inflation, and maintaining economic growth. If the government can create a favorable environment for investment while ensuring social stability, it might mitigate some of the backlash from austerity measures. Additionally, they must remain agile in responding to changing external circumstances, such as fluctuations in global markets and interest rates.
Interviewer: Thank you for your insights, Dr. Gonzalez. It’s evident that the path ahead for Argentina is fraught with challenges, but also potential opportunities if navigated carefully.
Dr. Maria Gonzalez: Thank you for the engaging discussion. The Argentine economy is at a critical juncture, and how it evolves in the coming months will certainly be one to watch.