Javier Milei took office at Casa Rosada on December 10, 2023 with the challenge of resolving the country’s economic crisis in one mandate. The first year comes to an end with Argentina divided in two: on the one hand, there are lean public accounts, falling inflation, a surplus trade balance, and a controlled exchange rate; on the other, there is more than half of the population in poverty, increasing inequality, stagnant local commerce, higher unemployment and contracting activity.
This duality prevents a direct assessment of whether or not Argentina is better now than a year ago, according to sources heard by the InfoMoney. In many aspects they state that it is possible to say that there have been improvements, but this is not an answer that can be extended to the scenario as a whole. The big question now is: what to expect from Milei’s year two?
Some of the points worked on in 2024 should be deepened in the second year of the libertarian’s term, but there is no clarity on how far Milei will be able to go. Three themes should guide the actions of the president of Argentina in 2025, all with great potential for internal and external repercussions.
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The guy with the stump
The big theme for Javier Milei in 2025 is the release of exchange control, called the cepo. Argentina’s Minister of Economy, Luis Caputo, has already announced that the departure from control will take place in 2025, but did not make it clear when this would happen.
The exchange rate block is a set of restrictions that limit the purchase of dollars within the country, but also restrict the movement of capital abroad. The control was imposed in 2011 to prevent the flight of dollars amid the economic crisis and the lack of foreign currency reserves at the Argentine central bank. An example of a restriction is the purchase limit of US$200 per month for individuals, with a tax of 60%. The block also prevents companies from transferring dollars abroad or paying debts with foreign currency.
The block is part of the basic measures that allowed inflation to slow down in Argentina last year. The restrictions along with the exchange rate devaluation helped to increase dollar reserves and control local price variations. In October, inflation was 2.7% – the lowest monthly rate since 2021. Year-to-date, it reached 107% and should end 2024 between 115% and 120% – half the market estimate of 227%.
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The removal of this exchange control is important to improve the business environment with the free circulation of money, however, As it is the foundation of the fiscal policy that is improving the country’s economy, getting out of the woodwork is not simple. Adriana Dupita, chief emerging markets economist at Bloombergstates that the main condition for release is for Argentina to reach a minimum value of foreign exchange reserves in dollars.
“It is not a trivial problem. According to the IMF, Argentina needs US$47 billion in reserves. Currently, it is estimated that the country has US$31 billion. If this minimum value is not reached, the release of the block could mean yet another capital flight or another bitter medicine, which is an increase in interest rates to maintain the attractiveness of investment in the country”, says Dupita.
. A year ago, rates went from a peak of 133% to 100%, undergoing further adjustments as inflation also slowed throughout 2024. With the economy in recession due to domestic weakness, the government’s objective is to continue cutting rates. fees. Therefore, the priority is the reserve in dollars, but Cristian Riom, an Argentine international policy analyst, sees difficulties in this option.
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“Achieving the appropriate volume of reserves is complicated by several situations. First, the situation is still not that good. Now there is talk of a probable loan from the IMF. I believe that Milei will reach an agreement. We must obtain capital and financing, but not the amount that Argentina needs to quickly get out of control”, he said in an interview with InfoMoney.
Popularity Test
The decision to leave the block also involves another fundamental issue for President Milei in 2025: the legislative elections. In 2025, the population will choose the next members of Congress, and the elections could strengthen the presidency if Milei gains more allies.
For this, better economy and popularity are important. “The decrease in the inflation rate gives the government an interesting margin to maintain certain levels of popular acceptance”, says Riom. But a stormy exit from the chopping block could harm that image.
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According to Dupita, the release of the block could result in a rebound in the devaluation of the peso and an increase in inflation in the short term. “There may be some volatility, appreciation or depreciation. The question is, if there is depreciation, it is better for this to happen after the October elections, not before, since inflation is an issue that speaks loudly to the heart of the Argentine voter”, says the economist.
The rate rose to about 47% in November, compared with 43% the previous month, according to LatAm Pulse, a survey conducted by AtlasIntel for the Bloomberg News. Argentine analyst Cristian Riom believes that the president will be able to correct for inflation the few subsidies that the government continues to pay to the poorest population with the intention of gaining support for the election, but does not expect additional efforts.
In an interview with InfoMoney in September, deputy Luciano Laspina, affiliated with Maurício Macri’s PRO, stated that the legislative elections will be the most important event for the government in the short term, due to the risk of a resumption of the opposition. Recently, Victoria Villarruel, stating that she is “close to the left”, highlighting a split in her base.
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“I don’t see a very aggregating Milei, even next year. His political strength is greater in the more distant and industrial provinces, while in Buenos Aires the opposition is gaining ground”, says Leandro Barcelos, manager of the BMJ international trade team. “If he doesn’t get more support now, the next few years could get more difficult. In this first year, many proposals took months to pass through Congress, and several fell by the wayside.”
Agro and mining are not enough
The third challenge of Javier Milei’s second year at Casa Rosada is managing to boost the domestic economy. Argentina’s Gross Domestic Product (GDP) recorded three consecutive contractions: -2.49% in the fourth quarter of 2023, -2.57% in the first quarter of 2024 and -1.7% in the second quarter of 2024.
The biggest detractors of this performance were the sectors linked to the domestic economy. Between April and June this year, the construction sector fell 22.2%, industry lost 17.4% and domestic trade fell 15.7%. Much of this dampened demand is the result of the “chainsaw” that interrupted public works, removed subsidies from some sectors and laid off a large portion of public servants.
The expected recovery in the third quarter is anchored in agribusiness and mining exports. “After two very bad years, Argentine agribusiness returned with strength in 2024, very much anchored in the export of grains and animal protein. Mining has also produced and exported well”, says Barcelos, from BMJ.
It turns out that agribusiness and mining do not depend on government actions to prosper, unlike the domestic economy.
“In general, the economy’s short-term growth occurs through fiscal stimulus, something that will not happen in Argentina because of the chainsaw. Monetary stimulus? It’s also difficult because you can’t release the stump at any time because of inflation. What remains is the simplification of the business environment to improve productivity and job creation issues”, says Dupita.
Bloomberg’s chief economist, however, considers that the result for small and medium-sized companies may be limited in the short term, with more chances of having repercussions in the medium and long term. “It’s difficult to say that the economy will grow simply because of Milei’s more liberal agenda, which is deregulation. But this is the game for 2025.”
The improvement in the domestic economy is directly linked to improved social and well-being of the population. Barcelos believes that from the second half of 2025 onwards, measures such as a reduction in inflation, expectations of economic growth and foreign investments in agriculture, mining and energy could have a more positive impact on inflation.
Riom, who lives in Argentina, has a different view. “I don’t think there will be a uniform improvement for the Argentine economy. Perhaps we may at some point feel a false sense of well-being, but the truth is that prices in Argentina are, in many ways, higher than in Europe and this will not go away.”
InfoMoney will publish based on this report and in the coming days a series about Javier Milei’s first year as president of Argentina. Follow here on the website and on our social media!
