Argentina’s new libertarian President Javier Milei has celebrated a raft of economic victories since taking office in December.
Dollar-denominated government bond prices have almost doubled; the closely watched black market exchange rate of the peso has stabilized; and this week Milei announced Argentina’s first budget surplus since 2008, calling it “an achievement of historic, global proportions.”
But on the streets of Buenos Aires, that success seems a long way off.
“It’s a very ugly time,” said Rodrigo, a 27-year-old from the working-class town of Moreno, who walks the capital’s Parisian boulevards and sells cleaning wipes to restaurants.
“My customers have less, so they buy less. . . Everyone in my neighborhood is screwed.
The austerity measures and deregulation that are driving market optimism have, at least in the short term, exacerbated Argentina’s worst economic crisis in two decades. The economy shrank 3.6 percent in the first two months of 2024 compared to the same period last year, and consumer spending fell sharply.
But while investors argue that serious problems are inevitable in 2024, they believe the economy will turn around then. The IMF forecasts a 2.8 percent decline this year and 5 percent growth next year.
Milei hopes that despite their daily difficulties, Argentinians will be as patient as investors.
Ezequiel, a taxi driver in Buenos Aires, said increased fuel and rental car costs had reduced his daily take-home pay to $10, less than the price of a bottle of olive oil. “How will my family survive with this?” he said.
Milei’s inauguration marked a significant change in policy from Argentina’s previous left-leaning Peronist government, which sought to maintain consumer spending. It fixed prices and the value of the Argentine peso, subsidized energy and transportation, and printed billions of dollars’ worth of pesos to finance a large deficit – leading to chronically high inflation.
When Milei stopped these measures and devalued the peso by 54 percent in December, annual inflation rose to 287 percent. Food prices have reached levels comparable to those in European capitals in a country where only a fraction of wages are paid.
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The average registered worker’s salary has fallen 19 percent in real terms since December to 619,000 pesos ($708), putting it below the poverty line. Experts say millions of unregistered workers have likely suffered even greater declines.
This meant a painful decline in the purchasing power of Argentines, who had already been struggling with annual inflation averaging over 50 percent for three years. Supermarkets and small retailers reported annual sales declines of 11.4 percent and 25.5 percent, respectively, in February, according to industry groups.
Factories have laid off workers and cut production in the face of falling demand; Milei’s suspension of 88 percent of Argentina’s public construction projects, a major source of both employment and corruption, has cost up to 50,000 jobs.
Thousands of soup kitchens say they are on the verge of closure after the government cut funding to curb corruption.
At the same time, middle-class Argentines are selling the dollars they traditionally keep “under the mattress” for pesos in order to afford rising health insurance fees. In the capital’s upscale areas, a once-booming restaurant scene has faltered, with seas of empty tables on weekdays.
Nicolás Dujovne, former economy minister in Argentina’s 2015-2019 center-right government, said: “The decline that Argentina is currently experiencing is largely a normalization that will eventually allow it to return to growth.” . Markets are paying virtually no attention to the current downturn. They look forward.”
The biggest risk to this recovery is that “Milei’s still-high approval ratings start to fall and opposition gains momentum in the streets and in Congress,” said Luciano Sigalov, a Buenos Aires-based researcher at Eurasia Group. That, in turn, would “make it more difficult for Milei to stabilize the economy,” he added.
According to the newspaper La Nación, 430,000 people gathered in Buenos Aires on Tuesday for a protest against cuts to public universities valued by Argentina’s middle class. Analysts said the figure was a warning light for Milei’s austerity measures.
According to Juan Germano, director of the polling institute Isonomía, the president’s support has remained stable so far and has remained at just under 50 percent since his election victory in November. According to Isonomía, even 30 percent of Argentines who say they will have difficulty managing their money by the end of the month support Milei.
“This is an extremely novel phenomenon in public opinion,” Germano said, attributing Milei’s support to deep frustration with previous Argentine governments’ handling of the economy.
“It won’t last forever [but] It looks like people are holding out a little longer than we thought.”
The key to this patience will be controlling inflation, analysts say. After peaking at 26 percent in December, monthly inflation fell to 20 percent in January, 13 percent in February and 11 percent in March.
Milei argues that if inflation continues to fall and the complex financial architecture that Economy Minister Luis Caputo has put in place continues to stabilize the economy, growth will soon return and fuel a rapid recovery.
Analysts say the path is fraught with risks and the next two months will be crucial.
Price pressure will remain strong as the ongoing reduction in energy subsidies increases tariffs by up to 400 percent.
Argentine companies warn that the peso has appreciated more than 25 percent against the dollar in parallel foreign exchange markets this year, erasing competitiveness gains from December’s devaluation. A revival of the activities of import-dependent industries would undermine Caputo’s efforts to rebuild Argentina’s scarce foreign exchange reserves.
Meanwhile, the sustainable fiscal surpluses crucial to market confidence in Milei are already becoming harder to achieve as the recession hits tax revenues. The political outsider president still needs to receive congressional approval for tax increases.
“If the government wants to maintain its fiscal results, it will have to further cut spending, and if the recession continues, that will further reduce tax revenues,” said Pablo Wahren, an analyst at the Argentine research institute Observatory for the Economy and Public Policy. “This could become a trap.”
Still, many economists say the worst is almost over. “We believe we will hit rock bottom [of the recession] This month or next, the recovery will begin in the second half of the year,” said Dante Sica, founder of real economy consultancy Abeceb.
But the recovery will be driven by export sectors such as agribusiness, he added. Sectors that rely on domestic consumer spending, which is expected to fall 6 to 8 percent this year, will be slower to recover.
Argentina’s beef industry, for example, exported more meat in February than in any other month since 1967, boosted by the devaluation of milei and the lifting of export restrictions. According to an industry group, domestic per capita consumption fell 17.6 percent in the first three months of the year to its lowest level in three decades.
Virgílio, a 69-year-old hardware store owner in Buenos Aires’ middle-class Almagro neighborhood, said he has reduced his beef consumption and relies on senior discounts to afford the staples of Argentine life.
“It was always going to be a tough year, but there was no other way out,” he said. “I just hope this crazy man can do what he promised.”