Javier Milei announced this Tuesday an official devaluation of the peso of 50% and turned on the chainsaw. The cuts in public spending will affect numerous sectors, including public works, energy and transportation subsidies, and transfers to the provinces. The ultra president of the South American country wants to cut some 20 billion dollars in public spending and will do so as quickly as possible. “There is no money,” the Minister of Economy, Luis Caputo, repeated as an argument when announcing the Government's first economic measures in a recorded message.
The official exchange rate went from 400 pesos per dollar to 800, a sudden devaluation of 50%. The value is still far from the other prices that coexist in Argentina, which exceed one thousand pesos per dollar, but it will have an immediate impact on prices.
Supermarkets and other food stores across the country, in anticipation of this measure, began changing their boards earlier this week. In a butcher shop in the wealthy Buenos Aires neighborhood of Palermo, employees changed the price twice on Monday and raised it again this Tuesday, by 25%.
In other sectors, however, such as construction, suppliers have been making excuses to clients for more than a week to avoid selling them materials before knowing the new value of the official dollar. “I asked for a quote for a zinc roof and three days later he told me that if I wanted it, the price would be double because the wholesale suppliers were not selling while waiting to have a price,” says an architect who does not want to be identified. “Some have to sell no matter what, but those who can hold on,” he adds.
Disorganized startup
The economic measures were going to be announced on Monday, but were later postponed until this Tuesday. The message was recorded in the middle of the afternoon and was scheduled to be broadcast at five in the afternoon. The Government sent a link to the website where it was going to be broadcast, but a few minutes after the announced time, that link stopped working. The recording was finally broadcast two hours late, at seven in the afternoon.
For the first ten minutes, Caputo gave a class on liberal economics. He attributed all of Argentina's ills to its “addiction to the fiscal deficit”, that is, to spending more than it earns and repeated the threat made by Milei in his inaugural speech: if there is no drastic cut in public spending there could be hyperinflation. of 15,000 in case of not making a drastic fiscal adjustment. “Let's imagine that milk goes from being worth 400 pesos to 60,000 pesos in one year. Our mission is to avoid this catastrophe,” said the minister in the long introduction.
He then announced a battery of ten measures. The first will be the non-renewal of State labor contracts that are less than one year old. This Monday it was already announced that an exhaustive review of the contracts of national Administration workers would be carried out. Public employment accounts for around 18% of Argentina's total employment, although during the Covid-19 pandemic it rose to 20%, according to data from the Center for the Implementation of Public Policies for Equity and Growth (Cippec). This is a much higher percentage than in other countries in the region such as Chile (12%) or Mexico (13%). In Argentina, the three administrations – national, provincial and municipal – add up to almost 3.5 million workers.
On the other hand, the suspension of government advertising for a period of one year was announced. “There is no money for expenses that are not absolutely necessary,” Caputo remarked. According to his data, in 2023 this advertising exceeded 30,000 million pesos (more than 75 million dollars in the official price until yesterday).
As had already been anticipated, public works are paralyzed: the State will not put out to tender new projects. The objective is that from now on it will be the private sector and not the public that is in charge of construction, in a concession system similar to the Chilean one.
Market reaction
The back and forth with communication increases doubts about an inexperienced Government that takes its first steps on the wrong foot. Market confidence will be tested tomorrow, when the foreign exchange market opens after two days of a hidden foreign exchange holiday. Those known as financial dollars were exchanged this Tuesday at almost 1,050 pesos per dollar, while on the streets of Buenos Aires they were exchanged this Tuesday at 1,075.
The Milei Government presents these measures as the only alternative to rebuild an impoverished country, but the upcoming adjustment will make the situation even worse: the economy, stagnant for three months, will collapse in 2024. There will be more inflation (today it is 142% year-on-year), more hunger (9.3% destitution) and more poverty (40.1%). The president promises that it will be a temporary sacrifice, for a maximum of two years.
Aware of the coming storm, the Executive promised to maintain current aid to the most needy population and increase the budget allocations for two of the programs: the Universal Child Allowance, the amount of which will be doubled, and the funds from the Alimentar card, which They will be 50% more.
Dialogue with China
The measures are intended to overcome the first months of this Government, especially until the fields begin harvesting, at the end of March, and dollars from exports from this sector, the most important in Argentina, begin to enter. Unlike the previous campaign, which was hit hard by the worst drought in the last 60 years, the rains that have fallen in recent months guarantee that some 25 billion dollars more will enter the country than in the previous campaign.
Many of Milei's promises have vanished when he became president and so has his idea of “not having ties with communist countries. It has taken the president only 24 hours to try to mend the relationship with China, one of Argentina's lenders in recent years. On Monday he received a delegation from the Asian giant at the Casa Rosada, in which he did everything possible to smooth over differences, and a day later he sent a letter to the Chinese president, Xi Jinping, to request the renewal of the currency exchange with China and obtain thus the equivalent in yuan of 5,000 million dollars.
Argentina urgently needs foreign currency to face the upcoming maturities of the $44 billion debt contracted with the International Monetary Fund in 2018, under the presidency of Mauricio Macri. With the central bank's reserves in the red, the currency swap with China was key in 2023 to comply with the payment schedule renegotiated with the IMF in 2021.
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