A New Dawn in South America? Argentina heads to the polls.

Jake Canton-Perry, Client Executive
12/10/2023

Argentina’s economy has recently been a synonym for mismanagement and inefficiency. What was once seen as a budding country in the international community, underwent financial shocks in the 1980s and then further turmoil as it defaulted on an IMF loan in 2001. Since then, fiscal conservatism has gone amiss as profligate spending by the government not only went unchecked by successive Presidents, but actively encouraged. It is perhaps not so surprising then that the Argentinian people, angry and disenfranchised by politics and the government apparatus, have launched Javier Milei, self-described as an “anarcho-capitalist,” up the 2022 Presidential election polls.

Under successive governments from both the centre-right and centre-left, the fiscal deficit has grown ever larger by the continuation of significant public sector subsidies. Sectors including healthcare, energy, education and public transportation were all offered to Argentine citizens for free or on the cheap. It is estimated that Argentines spend less than $5 a month on electricity. To fund a budget deficit of -8.5% consistently over decades, the government ordered the Central Bank to print money at such a rate that the amount of physical money in circulation has increased by 1,543% over the last ten years. The result of such a decision is that annual inflation has skyrocketed and hit 124.4% in August.

With the economy teetering on the edge, the IMF in 2018 offered its largest bailout in history worth $57bn. Just four years later, they were signing off on another loan worth $44bn. Whilst Argentina has managed to reduce their debt, it still owes $40bn to the IMF or roughly a third of its external debt. As a condition for the loan, the IMF imposed an 18% devaluation of the peso’s official exchange rate in August which officials have claimed as the primary reason for the peso’s recent nosedive by 134%.

In this era of political turmoil, enter stage right the libertarian and the former daytime television pundit dismissed by the political establishment. A climate change denier and a Jair Bolsonaro supporter, Javier Milei.

Out of anger and a desire for an alternative from the two main parties, the Argentine electorate shocked the establishment by voting for him as their preferred candidate in the August primaries. He has since remained at the top of the polls with 31% of the vote, edging out his closest rival Sergio Massa, the current Finance Minister.

What Milei proposes is the overthrow of the last seventy years of Argentine economic theory. His speeches even make Milton Friedman look tame. Gone are ten government departments and an additional 34 state companies privatised. Public spending to be immediately cut by 15% of GDP and the fiscal deficit brought to zero. The central bank to be disbanded. U.S. Dollars to completely replace the Argentine peso. He even admits that Argentina might have to soften its stance over the Falkland Islands. What Milei aims is the complete dismantlement of the “criminal organisation” he calls the Argentine state.

Yet what impact would Milei have for the Argentine economy and business if he was elected and attempted to push through his policies? The reality is that the change necessary will take a herculean effort and financial chaos will presumably remain the order of the day.

Primarily, even if Milei does succeed in winning the presidency, he would lack the congressional majority needed to implement his wish list of policies, let alone govern. His party, Avanza Libertad, lacks national foundations and is estimated to gain only 8 of 72 senate seats and 35 of 257 seats in the lower house. Thus, making it very easy for opposition parties to block any policy they disagree with. In addition, Milei is massively depending on markets being enamoured by the potential results of his policies. He expects the “freedom” of a completely neo-liberal state to bring forward business investment and strengthen the Argentine economy. In contrary, businesses have expressed their lack of confidence in Milei, as his victory in the August primaries brought the further collapse in the peso’s value. Economic analysts expect the peso and the economy to continue its decline if he was to be elected President.

As such, it is a real possibility that a Javier Milei presidency could face severe resistance from the traditional parties and struggle to provide a solution to the problems gripping the nation. It has been suggested his policies lack detail; he plans to bring in a voucher system for education rather than the state providing funds to schools. His critics state that he has failed to calculate whether they are financially viable; Milei still believes that all the dollars needed for the dollarisation of the economy can come from the repatriation of the dollars that Argentines hold abroad. Altogether, whether Milei succeeds or not, the situation requires decisive decision making and no easy fixes are presenting themselves.