Since officially taking office earlier this week, the Milei government in Argentina has been continuously rolling out new policies. On Wednesday, Economy Minister Caputo revealed in a TV interview that the reduction of energy subsidies might take effect in February or March next year. He also warned that December's inflation would be "significantly higher" than November's.
Argentina's National Institute of Statistics and Census reported that November's inflation soared by 18 percentage points to 160.9%, exceeding the market expectation of 158.5% and setting a new record high.
On Tuesday, the newly appointed economic minister announced a series of new policies, including devaluing the Argentine peso by more than 50% (800 pesos per US dollar) and setting a monthly devaluation target of 2%. This devaluation, unexpected by external forecasts, will further impact inflation. Before Milei's inauguration, the market anticipated a devaluation of about 27% in the first week of the new government, while investment banks like JPMorgan and local private consulting firms estimated a devaluation of around 44%.
Other policies announced by the new government include a series of cost-cutting measures, such as significantly reducing electricity and transportation subsidies, halting new project tenders, canceling approved tenders not yet started, discontinuing contracts for public projects less than a year old, privatizing future infrastructure projects, reducing federal transfers to 23 provinces, halving the number of government ministries to nine, and dismissing public employees recruited in the past year.
At the same time, the new government seeks to increase revenue, such as raising import taxes to 17.5%, restoring personal income taxes reduced by the previous administration, and gradually eliminating export taxes.
According to estimates provided by the Argentine government on Wednesday, the cost-cutting measures will save funds equivalent to 2.9% of GDP, and the tax increases will bring in revenue equivalent to 2.2% of GDP, bringing the overall budget close to balance by the end of 2024.
Reactions to the new policies are mixed. Major creditors initially expressed appreciation. The International Monetary Fund (IMF) stated that "these bold initial actions" aim to significantly improve public finances and strengthen the foreign exchange regime in a way that protects the most vulnerable social groups. If implemented decisively, these policies will help stabilize the economy and lay the foundation for more sustainable and private sector-led growth. Argentina currently owes the IMF $43 billion.
Other institutions are more cautious in their responses. Analysts at Citibank view the fiscal adjustments positively, although execution risks remain in a challenging political situation. JPMorgan analysts see downside risks and predict an economic recession for Argentina next year, with a 3% decline in GDP.
Fitch Ratings said the adjustment would be painful, with economic, political, and social risks on the road ahead. The reason lies in Milei's party having almost no representation in the legislative body and not controlling any governor positions, with an unstable alliance with more influential parties and power brokers, and a fragile social situation.
"This is a bitter pill to swallow," said Jimena Blanco, Chief Analyst at risk consultancy Verisk Maplecroft. The key, he believes, is how long the public's patience will last while waiting for economic improvements. Economist Martín Rapetti from the University of Buenos Aires also expressed similar concerns, saying the measures will exacerbate inflation and poverty, questioning, "How much tolerance will society have for these measures? It's the people who will pay the price."
The Argentine left is prepared to resist. As details of the new policies were gradually revealed, left-wing union leaders held emergency meetings. "This is a social murder, a psychopath about to slaughter defenseless victims," wrote Juan Grabois, founder and activist of the Argentine Workers' Union, on social media, indicating potential public protests. Axel Kicillof, the left-wing governor of Buenos Aires Province, also vowed to "fight bravely."
The current government has repeatedly warned of potential negative consequences of the new policies. In his inaugural speech, Milei already cautioned, "In the short term, the situation will worsen, but then we will see results, marking Argentina's last difficult period before dawn."
To mitigate the impact on the public, the Milei government also announced some countermeasures. For example, to soften the blow, the child support for poor families will be doubled to $50 per month, and food subsidies will be increased by 50% to $85 per month.
Although Milei portrayed a quirky and exaggerated image during the campaign, his stance has softened since winning the election last month. The most radical statements like "closing the central bank, adopting the dollar" have not been mentioned, and his cabinet choices have shown a more conventional pragmatic attitude.
However, Milei's economic "shock therapy" is undoubtedly experimental. Although countries like Ecuador, El Salvador, and Panama have adopted similar measures, and Bolivia has successfully curbed hyperinflation and overcome a debt crisis, they are all small-scale countries, incomparable to Argentina, the second-largest economy in South America. Russia once adopted "shock therapy" after the dissolution of the Soviet Union, but it was halted by Yeltsin after severe GDP contraction and rising fiscal deficits.
Regardless, Milei has accelerated, and Argentina has entered the tunnel. Whether light lies ahead remains unknown.
