On 12 December Argentina’s new government led by President Javier Milei devalued the peso by over 50% as part of a package of economic shock measures.
Analysis:
In a pre-recorded video address, Economy Minister Luis Caputo announced the measures, which he said were aimed at avoiding hyperinflation and reducing the fiscal deficit, pinpointed as the cause of Argentina’s economic woes. However, like Milei in his inauguration speech, Caputo was clear that the situation would get worse before it got better, with prices set to skyrocket in the coming months. The measures have been welcomed by financial institutions including the International Monetary Fund (IMF), to which Argentina owes US$44bn, and the Inter-American Development Bank (IDB), and are a far cry from the radical proposals espoused by Milei on the campaign trail such as dollarisation and shuttering the central bank (BCRA). However, the road ahead is long and Milei’s government will have to tread carefully to mitigate the social impact of the measures and manage a bitterly divided political landscape.
- In his address, Caputo stated that he had inherited the worst economic legacy in Argentina’s history, with a fiscal deficit of 5.5% of GDP, annual inflation of 143%, and a severe shortage of foreign currency. “There is no money,” stressed Caputo, a phrase that is becoming somewhat of a mantra of the Milei government.
- Caputo said the government was going to address the “root problem”, rather than the consequences, of the economic crisis, saying that, “for this we need to solve our addiction to fiscal deficits”.
- The ten measures that Caputo presented slash public spending equivalent to 2.9% of GDP, with savings made through reducing energy and transport subsidies; keeping federal transfers to the provinces at a minimum; cutting social security and pensions; halving the number of government ministries (from 18 to nine) and departments (from 106 to 54); and cancelling tenders of public works, which Caputo stated were a main source of government corruption.
- Caputo also announced that the government was devaluing the peso to around Ar$800 per US$1 from just under Ar$400 last week – a devaluation exceeding market expectations. Since 2019, the peso has been kept artificially strong by strict capital controls, causing a gulf between the official exchange rate and parallel rates.
- Caputo said the currency devaluation should provide the productive sectors with the right incentives to increase production, boosting the amount of dollars received for exports. Caputo also announced a temporary increase on import tax and withholding taxes on non-agricultural exports, which he said would benefit exporters with a better price and equalise the tax burden for all sectors – “ceasing to discriminate against the agricultural sector”.
- The economy minister pledged to overhaul the existing system of government permits for imports and, once the economic emergency is over, eliminate export taxes, a bane of Argentina’s agricultural sector.
- To mitigate the impact on the most vulnerable in Argentina, where more than 40% of the population live in poverty, Caputo said the value of the government-provided food card would rise by 50% and child benefits would double.
- IMF spokesperson Julie Kozack praised the government’s “bold initial actions”, stating that, “their decisive implementation will help stabilise the economy and set the basis for more sustainable and private-sector led growth”.
- Ilan Goldfajn, president of the Inter-American Development Bank (IDB) similarly welcomed the “decisive measures”.
Looking Ahead: The BCRA, headed up by Caputo ally Santiago Bausili, is set to make announcements on monetary policy measures, interest rates and debt today (13 December). Milei has previously indicated that the phasing out of the Leliq, a short-term peso-denominated debt instrument of the BCRA, is a priority.
