President of Argentina Javier Milei. Photo: zn.ua
Government’s Balancing Act
President Javier Milei of Argentina is striving to maintain public support by postponing increases in fuel taxes and utility prices. While this decision risks destabilizing markets, the government aims to prevent further inflationary pressures.
Economic Policy Challenges
Recent actions highlight the complexities Milei faces in stabilizing the economy without exacerbating high inflation. New data expected this Friday may reveal rising consumer prices after a five-month decline.
Currency Devaluation and Capital Controls
The Argentine peso reflects these challenges, with the government refraining from accelerating the monthly devaluation of the official exchange rate by 2%, known as a creeping peg, or fully abolishing capital controls due to fears of further price hikes.
Market Reaction and Future Prospects
Despite Milei’s achievements like reducing monthly inflation to 4.2% in May and achieving a budget surplus for the first time since 2008, investors and economists caution about the vulnerabilities of the creeping peg. Citigroup Inc.’s Chief Economist for Latin America, Ernesto Revilla, noted, “Argentina’s macroeconomic situation is not on a stable trajectory, so continuing unchanged may lead to something bursting.”
Political Ramifications and Future Challenges
Milei also faces pressure regarding his currency policy. Discussions with the economic team indicate that any changes in the exchange rate could diminish Milei’s popularity among the middle class, which forms the backbone of his support.
Despite these efforts, Argentine sovereign bonds have shown some of the poorest results among peers in the markets, although investors have gained a 39% return since Milei took office. However, prospects for receiving new funds from the International Monetary Fund remain unlikely.
Minister of Economy Luis Caputo confirmed that the government will not devalue the peso again, emphasizing the primary goal of reducing inflation. However, measures such as freezing electricity and gas tariffs may contradict earlier promises of price increases.
Therefore, despite some successes in economic stabilization, significant challenges lie ahead for Argentina, requiring a careful and balanced approach.
Source: Bloomberg
