Can Argentina reboot its crisis-ridden economy?
President Javier Milei’s severe austerity package has helped tame the country’s chronic inflation crisis.
In April, Argentina secured a US$20bn loan from the International Monetary Fund (IMF), as well as a US$12bn support package from the World Bank and US$10bn from the Inter-American Development Bank. The loans are vital to President Javier Milei’s efforts to overhaul the country’s struggling economy. As part of the arrangements, the Argentine central bank is relaxing restrictions on the purchase and sale of foreign currency and has introduced a partial float of the peso’s official exchange rate.
Milei was elected in November 2023 on a platform of economic liberalization and fiscal and monetary conservatism–a radical break from Argentina’s interventionist past, characterized by excessive overregulation and unconstrained public spending. Despite commanding a minority in Congress, the 54-year-old former economist has proved adept at passing legislation and–keeping with campaign pledges–has implemented a severe austerity package which has helped tame the country’s chronic inflation crisis.
Milei has also embarked on a deregulation campaign and begun cutting tariffs. As a result of his policies, the Argentine economy is showing signs of recovery and consumer and investor confidence has rebounded – Argentina’s Merval index rose more than 150% over the course of 2024.
Domestic industry
Argentina remains overwhelmingly reliant on imports, which has led to deep structural imbalances. One of the principal challenges facing the government is working out which industrial sectors it needs to focus on and develop. Many domestic industries–such as automotives, chemicals and steel–have been coddled by decades of special protections leaving them dysfunctional and uncompetitive. Other sectors, such as clothing and textiles, struggle to compete with low labor costs in other parts of Latin America.
The backbone of the country’s economy remains agriculture. Argentina is the sixth-largest beef exporter in the world and is in a strong position to increase market share. The country is also among the world’s leading producers of soy, corn, barley, and other key agricultural commodities.
The road ahead
Although the country’s outlook is much brighter than it was before Milei came to power, many challenges remain. The government has to find a way to continue to deliver growth and keep a lid on inflation. Argentina’s precarious backdrop makes it vulnerable to external economic shocks and many investors remain understandably cautious given its history.
The midterm legislative elections in October present Milei’s administration with the opportunity to strengthen its position in Congress and the outcome of the vote should play a key role in setting the agenda for the rest of Milei’s four-year term. Further ahead, Milei needs to win re-election in the next presidential election in 2027 in order to maintain investor confidence in his program – and the long-term viability of Argentina’s extraordinary economic turnaround.
Read the full paper: Can Argentina reboot its crisis-ridden economy? (federatedhermes.com)