The government of the ultra-liberal Javier Milei, in Argentina, reaches the end of 2024 with levels of popularity higher than those obtained by his predecessors Alberto Fernández and Mauricio Macri for the same term of office.
Inflation has fallen to less than 3% per month, country risk has fallen by two thirds, finances are in order (after draconian cuts in public spending), and an absolutely unusual fiscal surplus has been recorded. — still incipient — of having left the worst days behind, with the prospects of a good agricultural harvest and gas production on the rise.
Now the main threat to Milei, in 2025, is on this side of the border. And it has nothing to do with the ideological abyss between him and President Luiz Inácio Lula da Silva (PT). This is the devaluation of the real.
Today, in Buenos Aires, there is a ghost that takes us back to January 13, 1999. On that distant Wednesday, the exchange rate controlled in Brazil died suddenly. Then began the Argentine nightmare of maintaining peso-dollar parity. As we know, it ended badly: there was “corralito” (blocking of bank deposits), max devaluation, debt default.
Let’s go back to the present. this year. No one guarantees that you won’t lose even more. That the dollar will not go to R$7 instead of returning to R$5. This is a shot with immense potential for damage to the already weakened competitiveness of the neighboring country.
Exchange with Brazil represents 30% of all Argentine foreign trade. More importantly: it is equivalent to around 60% of exports and imports of industrialized products. If it is cheaper to buy Brazilian tires or biscuits, for example, Argentine factories close work shifts.
Economist Alberto Cavallo, a Harvard professor and son of former minister Domingo Cavallo, compared prices in Brazil and Argentina for an identical basket of food, fuel and electronic products. He reached the following conclusion: Brazil is 19% more expensive, in dollars, than Argentina. For those who traveled to the neighboring country and thought everything was a bargain, until recently, the situation has changed.
Then it is time to return to political analysis and emphasize how the exchange rate anchor and the managed dollar have played a key role.
Nominally, the peso at over 1,000 to the dollar looks weak. But don’t be fooled by impressions. It has become strong in real terms because its devaluation is insufficient to offset inflation. Result: very cheap imported products and services, recovering purchasing power, success in the government’s efforts to contain the price spiral.
So far, everything is great for Milei. The Confidence in Government Index (ICG), measured by the traditional Buenos Aires university Torcuato Di Tella, shows an approval rating 43% higher than Alberto Fernández’s measurement in December 2020 and 7% higher than Macri’s in December 2016.
The fight against inflation is the driver of libertarian popularity. It was the biggest concern of Argentines in the last presidential elections and Milei is managing to tame it. in November of this year — considerable evolution for a period of 12 months.
Low inflation (by Argentine standards) requires a strong peso. A strong peso requires massive inflow of dollars, which is not the case, or exchange rate control.
When your largest trading partner devalues the currency so much, as has happened with the Brazilian real, the task of managing the value of the peso becomes much more complicated.
The Milei government has two alternatives. The first is to allow an adjustment in the exchange rate and also devalue it. Given the likely impact on inflation, it becomes a politically less attractive option.
The second is to look for more dollars. To achieve this, a new agreement with the International Monetary Fund (IMF) is crucial. Casa Rosada is already talking about an agreement, in the first four months of 2025, to obtain another US$10 billion from the Fund.
One problem is the possible resistance of the bureaucracy at the IMF. Argentina has a debt of more than US$40 billion with the organization. It is natural that there is little appetite among technicians in Washington for even more exposure to a South American country with a long history of defaults.
To double her resistance, Milei has a super ally: . He is convinced that the Republican, with whom he has a close relationship and ideological affinity, will give the necessary push to unlock a new agreement.
Here is the most likely path for Argentina in 2025: a robust loan from the IMF, additional breathing space to keep the peso valued, an attempt to lower inflation further. And a lot of fans, in the meantime, for Brazil to succeed.
