The government of the far-right Javier Milei will maintain a strict policy of deficit control in 2025 to lower inflation. It will also deepen its fight against social organizations that currently control aid to the poorest, will advance in the reduction of the State and will increase spending on defense and security. Argentines can expect an interannual inflation of 140% in December, compared to the 276% recorded in May. The rise in the CPI will not be accompanied by the exchange rate, which will only rise by 58%, to 1,016 pesos for each dollar in the exchange rate controlled by the State. The figures come from the preliminary report of the budget for 2025 that the Casa Rosada sent to Congress.
The report is optimistic about the strategy of controlling inflation and reducing the fiscal deficit, after a policy of harsh cuts in state spending. The Casa Rosada completely suspended public works, cut off the money transfers that by law correspond to the provinces, fired almost 30,000 public employees and drastically reduced the cost of pensions thanks to inflation liquidation. In the first quarter, Milei celebrated the fiscal surplus both primary and financial, that is, after paying the interest on its foreign debt. The flip side was a deep recession that the report sent to Congress crudely shows: the Gross Domestic Product will fall this year by 3.5%, private consumption by 6.6% and investment by 17.2%. According to the projections of the Casa Rosada, the paralysis of consumption and industry will shoot up the trade surplus to 22 billion dollars, after an estimated fall of 17.7% in imports and a rise of 21% in sales abroad.
During 2025, the aim will be to “maintain the conditions of macroeconomic stability that allow the definitive takeoff of the country’s productive potential,” says the report of the Budget project, which will reach the Argentine Congress in its final version in September. The text is a celebration of the adjustment of the economy with which Javier Milei began his administration almost eight months ago. The markets, however, increasingly doubt the sustainability of a plan that until now is based only on controlling inflation by means of a tourniquet on spending and the issuance of pesos. This is what investors made known to the Government at the start of the week: in just 48 hours, the dollar exchange rate on the parallel market, which is not controlled by the State, rose 80 pesos, 6% compared to Friday. The gap between the official and informal exchange rates exceeds 50%, evidence of the market’s expectations of devaluation. The budget projections are not encouraging. The fact that the official exchange rate has risen by less than 60% for a projected inflation of 140% adds arguments to those economists, many of them as orthodox as Milei, who think that the official dollar rate is outdated.
The problems in the exchange market began in May, when the Central Bank reduced the interest rate to 40%, almost seven times lower than inflation. It thus attempted to reduce the issuance of pesos derived from the payment of interest on the debt. The effect was an increase in the demand for dollars by savers who no longer found refuge in investments in pesos. Distrust grew from last Friday. After the approval in Congress of the law that Milei demanded to advance the dismantling of the State, the president announced the beginning of a “phase two” of his economic strategy that would give way to growth.
The markets had taken for granted that this new stage would include the end of the restrictions on the purchase and sale of foreign currency, the so-called “exchange rate restrictions.” Companies need the end of the controls in order, for example, to be able to send the profits from their local operations to their parent companies. But the end of the controls was postponed to a vague “phase three,” as announced by the Minister of Economy, Luis Caputo. The official argument is that the current level of international reserves, close to zero, is not sufficient to face an eventual speculative attack against the peso if the exchange market is finally freed.
On Friday, Caputo announced as the only measure of the so-called “phase two” the launch of a new bond that transfers the liabilities of the Central Bank to the Treasury, a tool that gives the former more tools to play with the interest rate without increasing the cost of the debt. Faced with the rise of the parallel dollar, the Government accused “operators” who only seek to force a devaluation of the peso to do business. “Believing that there is a devaluation in the making arises only from the thinking of some market operator,” said the Chief of Ministers, Guillermo Francos. “The money supply has not increased, it has not been issued and it has not gone into debt, so there is no situation to generate that unstable mood in the markets,” he added.
On Wednesday, the parallel exchange rate recovered some ground and fell to 1,405 pesos per dollar, 1.75% less than on Tuesday. Whether this will be the new floor for the currency will be known in the coming days.
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