Social resistance and very high inflation are the strongest threats to Javier Milei’s ultra-orthodox economic adjustment plan. Both are a direct consequence of the decisions that the libertarian government made in its first month and a half in office. What happens at both levels in February and March will be decisive in facing the crucial month of April, when the continuity of the ongoing program or its replacement in more or less chaotic conditions will be at stake.
The President’s ability to overcome the obstacle of political weakness intrinsic to the La Libertad Avanza government, with a clear minority in Congress, is another essential issue for the application of the economic plan. The recognition this Friday by Minister Luis Caputo that he had to lower the fiscal chapter of the omnibus law due to the rejection of governors and the friendly opposition exposes the difficulties in this area and opens more questions about the political consistency of the ongoing project.
When it is said that what Milei does is the same thing that any other force would have done, it is enough to wonder if Sergio Massa or Horacio Rodríguez Larreta, not to mention Myriam Bregman, would have chosen the modo shock to start his mandate, with an exchange rate jump of 120 percent, a cut in public spending to the point of not supplying soup kitchens, setting interest rates in negative pesos and structural transformation of the economy – in a wild neoliberal plan – with the DNU and the omnibus law. Clearly not. It is the plan of Mercyand what happens and will happen is your responsibility.
With the same legacy of the Alberto Fernández government, plus the decade of stagnation, plus the return of the IMF, those leaders would have tried another path and would have shown another political path. The libertarian likes to blame and bully even his circumstantial allieswith whom he has to negotiate, such as governors and soft opponents. That is his style, it is his government and it will be his results..
With all this, the program that started on December 10 shows at this point strengths and weaknessesin terms of sustainability, not on the social level or in relation to the common good, which are being trampled with absolute shamelessness and even with doses of sadism.
Strengths
The greatest asset that the Milei government has is the dollar rain that there will be this year due to the record or almost record harvest, plus the increase in exports of hydrocarbons and minerals, plus sales in general due to the liberalization of foreign trade and the availability of greater exportable balances. Added to this is the foreign exchange savings due to lower energy imports, due to the Néstor Kirchner gas pipeline, and the decrease in purchases in general due to the contraction of between 3 and 4 points that the GDP will suffer.
All of this can be a key factor in ordering the exchange front, an indispensable condition – never sufficient – to stabilize prices and the economy..
“This government will have between 20 billion and 25 billion dollars more than last year. If Massa had managed that, he would stay until 2045,” represents Jorge Carrera, former vice president of the Central Bank in the previous government.
“They objectively got dollars. The Central Bank is buying dollars and is liquefying pesos. Fiscal spending decreased and is not being issued to finance it. They are important signs. What you have to see is how much you can endure,” adds the economist, anticipating one of the main challenges of the ongoing plan that will be analyzed below: social tolerance.
“With dollars and lower fiscal spending it is easy to organize the economy. But the body has to resist“Insists Carrera.
The other leg of the plan is the fiscal and monetary anchors, which like every recipe has benefits and contraindications. The size of the dose is decisive for its application to be virtuous in the ordering of expectations and as an eventual platform for a subsequent takeoff or harmful to the point of causing damage that is difficult to reverse in terms of recession, unemployment and social destabilization, leading to the plan is very compromised or flies into the air.
“The conditions that the government has due to the rain of dollars are wonderful, but there is a lot of distrust in the ability to manage“, analyzes Carrera.
In this difficult week for the government, in which there was a general strike and mobilizations throughout the country of enormous relevance, with a minister ejected in the middle of a scandal, with the head of the Economy also in doubt, plus the failure in the attempt to impose the omnibus law in its original version, there was a fact that played in favor of the official project that was the greater acceptance that the bonus for importers, the Bopreal, began to have.
“It is a very controversial instrument because it can be part of the process towards dollarization. They are generating debt commitments in dollars that did not exist, but they are managing to withdraw pesos from circulation for the equivalent, until now, of 5,000 million dollars, and they are generating a secondary market for those titles,” explains Carrera.
Weaknesses
As indicated at the beginning, Very high inflation and popular discontent seriously threaten the economic plan. It will be decisive that the price index falls to less than 25 percent in January, less than 15 points in February and less than 10 in March so that an intense liquidation of the coarse harvest begins in mid-April, without new devaluation pressures. If inflation remains above these levels, it will be difficult to contain the gap with financial dollars and avoid another round of exchange rate adjustment, which would further compromise the other flank, that of social resistance.
The decision to cancel the increase in withholdings that was proposed in the omnibus law attempts to neutralize the pressure from rural exporters for another devaluation. But if inflation does not subside at the pace described, the risks of a new rise in the official dollar will be more than important.
The factor of social accompaniment or rejection is equally substantial. The strike on the 24th was a resounding blow to the ruling party, beyond its attempts to minimize the obvious: that more and more people reject the current administration and question the basic promise of Milei and Caputo, that this was the only thing that could be done and that after the enormous sacrifice of the adjustment, the long-awaited stability and prosperity for everyone will come.
“There are still a lot of people who bank, but there are also more and more people who are embarrassed“summarizes Carrera.
“Besides, This is a very weak government politically that is managed in a very strange way.. You have to have a lot of strength to get past everyone as they intend. “It’s not going to work for them,” the economist interprets. The setback in the omnibus bill gives credence to his hypothesis. “The omnibus law generated more costs than benefits. Something of everything they proposed is going to be approved because if not the government will fall. But they are making fools of themselves,” he emphasizes.
Beyond short-term weaknesses, such as inflation and citizen opposition, the plan also leaves doubts about its future sustainability due to the externalities it is causing. The most dangerous is the recession and rising unemployment. “Many people forgot about the cancer that is unemployment, nor did they appreciate that the previous government had lowered it to minimum levels when they went to vote, but if it is installed with the strength it had in the ’90s it will not be easy for Milei to contain the popular anger,” Carrera warns.
On another level, negative interest rates in pesos can put the banking system in trouble. “The rate is generating a very negative cost in the financial system and black swans may appear. Fixed terms in pesos were the main funding element for banks. They don’t have much business left to do, because they can’t lend either,” warns the former Central vice president.
“There are 70 banks and not all of them are the same. In the large ones there may be a profitability problem, but in the small ones more serious problems may appear and that this precipitates a consolidation process in which some entities have to be absorbed by other larger ones. size. It is an issue that always generates nervousness and can be serious if not handled well,” he adds.
“If the economic plan does not manage to be consolidated until March, it is likely that the Government will try to recreate convertibility as in the ’90s or play much more and go for dollarization. I suppose it will opt for the first alternative, a new convertibilitywhich in some way can be at hand and is a less disruptive bet than the total dollarization of the economy,” concludes the economist.
