The Rollercoaster and The President: 180 Days into the Milei Administration

After a surprising victory, President Javier Milei took office on December 10, 2023. He is Argentina’s ninth since the country’s return to democracy in 1983. While we Argentines have become used to a seemingly never-ending rollercoaster, whipsawing us between the promises of fundamental change and long-term prosperity and the calls for equitable redistribution of wealth, this time seemed different. 56% of the population elected an outsider unafraid to shout and use crude language but also keen to demonstrate an understanding and expertise of economics never before seen in a presidential candidate—at least in our lifetimes.

The first 180 days of the Milei administration have offered mixed results. International followers of Argentina are curious about the new president. Effective use of social media, a firebrand persona, meetings with significant (sometimes controversial) international figures, and an unwavering bludgeoning of the past, have contributed to the “Milei Phenomenon.” Many ask, “Can Milei succeed?”

This note cannot answer that question. But it can offer a better one: Is Argentina willing to embrace Milei’s policies?

The following paragraphs summarize recent events affecting the Argentine business ecosystem as a means to divine what may soon follow. We believe Milei’s fiery rhetoric is a sideshow, aiming at times to distract and at other times to drive home a message. Thus, if we set aside the political theater, we can better focus on the actions of his administration.

Milei managed to quickly defuse the economic bomb he inherited from the previous administration. These included a hard devaluation (over 100%) of the currency, a removal of most price controls (prompting a sharp increase in fuel, public utilities, and private healthcare), the slashing of government spending, all while maintaining the financial suppression rules that had ringfenced the outflow of hard currency.

The effects were immediate. Argentina went from a bargain to becoming unduly expensive, in each case measured against the dollar. With purchasing power pulverized, inflation receded from 25% per month in December 2023 to 4% in May 2024. The country has reported a fiscal surplus for five consecutive months. Private debt to pay for imports and dividends inherited from the prior government has been largely restructured through conversion of that debt to dollar-denominated sovereign bonds (the so-called “BOPREAL”).

Argentina’s sovereign risk rating has decreased; the annual prime lending rate in pesos has been cut from 111% to 40%. The Central Bank has slowly accumulated international reserves, which were fully depleted when the administration took office.

Perhaps most importantly, the Argentine measure of economic stability—the dollar-peso exchange rate—has remained stable. As the government pursues a planned 2% monthly devaluation of the official rate, the gap between the official and market rates has steadied between 10% and 20%, a far cry from the 150% that prevailed at the end of last year.

The brutal change in pricing relative to the dollar has brought recession. The government reports a 10% drop in the economic activity level compared to last year and the loss of approximately 100,000 payrolled jobs.

Immediately upon taking office, President Milei issued an executive order to repeal or amend more than 300 laws, rules, or regulations. In general terms, the executive action endeavors to sharply pare bureaucracy and to limit government involvement in the private sector economy. While some of these efforts have been halted by the judiciary, many remain in place, including the repeal of:

• Restrictions on foreign ownership of rural land.
• Restrictions on the freedom of contract to define terms of residential and commercial leases.
• Regulations affecting critical industries such as communication (including satellite communications), healthcare, tourism, and airline travel.
• Restrictions on the freedom to contract in foreign currency.
• Laws and regulations affecting domestic commerce (e.g., restrictions on product display in retail outlets; mandates of domestic supply and price controls on key consumer items like meat, dairy, and fuel; laws requiring businesses and government to favor domestic products).

Since the beginning of the year, the president has been engaged in a political battle to enact structural reforms to promote investment. The so-called “Ley de Bases” narrowly survived the Senate and, together with a tax reform package, will return to the House of Representatives. We expect both initiatives will become law within the next two weeks. When this happens, the administration will have successfully enacted important structural reforms such as:

• Eliminating or reducing government agencies to decrease cost and enhance efficiency, including the privatization of certain government-owned companies.
• Creating a Large Investment Incentive Regime or “RIGI” for projects involving investments of more than US$200 million.
• Modernizing employment laws to increase jobs and reduce employer risk.
• Declaring a public emergency in administrative, economic, financial, and energy matters for one year, thereby investing the president with law-making authority normally reserved to the legislature until mid-2025.

With the Ley de Bases and the tax reform package soon to become law, the Milei administration concludes the initial phase. The challenge now turns on sustainability of the measures, which will depend on how quickly the economy can rebound. The Milei government has no new recipes for economic growth, however, insisting on a return to international credit, stimulus by lowering taxes, and modernizing the economy to attract foreign direct investment. The rollercoaster has been down this track before. It remains to be seen, however, whether Argentines will stay on this time until the end of the ride.

Despite the recession, the president’s public support so far remains strong with no significant civil unrest, as many feared. Public opinion polls indicate most people understand the current sacrifices are necessary to stabilize Argentina’s future. The opposition remains divided, and if the economy begins to recover, Milei will be in a favorable position to win next year’s mid-term elections and gain stronger support in Congress, enabling deeper structural reforms.

We are encouraged by the Milei administration’s show of political savvy. If the macroeconomy continues its path towards health, if commodity prices rise, if the promises of natural resource extraction like Vaca Muerta and the Lithium Triangle can be shepherded to reality, and if the electorate is rewarded by an uptick in economic activity by early 2025, then we might conclude Argentina has been willing to embrace Milei’s policies.

In the meantime, keep your seatbelts fastened.