Milei dials back shock therapy to keep Argentina’s inflation in check

President Javier Milei is tapping the brakes on his shock therapy programme in a bid to hold on to popular support amid Argentina’s bleak economic reality, even if it means unsettling markets.

This month, the libertarian leader postponed increases to fuel taxes and utility prices that together would have added 1.2 percentage points to monthly inflation, according to JPMorgan Chase & Co. Heavily subsidised train fares have been frozen since May, and the price of bus tickets hasn’t budged since April. 

Those delays lay bare the narrowing road ahead as Milei tries to fix a broken economy without fanning already sky-high inflation. A fresh reading Friday is expected to show the monthly rate of consumer price gains rose after five straight declines.

“The government started to focus so much on achieving a sustained slowdown of inflation that it began to leave aside its other objectives,” said Nicolás Gadano, chief economist of Buenos Aires consultancy firm Empiria. “Postponing more price adjustments means those inflation wins are a bit of bread for today, but hunger for tomorrow.”

Argentina’s currency also exemplifies that tension. Since a 54 percent devaluation in December, the government has rejected calls to speed up its two-percent monthly depreciation of the official peso rate, known as the ‘crawling peg’ — or strip capital controls altogether — because they fear a faster clip would only juice prices more. As a result, exporters are withholding their soybeans and the Central Bank’s accumulation of reserves has ground to a halt.

“Energy tariffs are a fine harmony between reducing subsidies and inflation,” Economy Minister Luis Caputo said Thursday in a radio interview, reiterating that Argentina would not devalue the peso again. “The priority is to lower inflation.”

Caputo fiercely defends the crawling peg behind closed doors too, despite mounting pressures to devalue the currency. Any foreign exchange moves would dent Milei’s popularity among the middle class, the backbone of his programme, according to multiple people who met with the economic team in recent weeks. 

While investors and economists laud Milei’s work thus far — monthly inflation slowed to 4.2 percent in May from 25.5 percent in December, and the government is running a budget surplus for the first time since 2008 — they warn the crawl has an Achilles heel of sorts.

“Argentina’s macro situation is not on a stable trajectory so if we continue this way without any changes, something will explode,” said Ernesto Revilla, chief Latin American economist at Citigroup Inc. “You can’t let the exchange rate depreciate at a rate so significantly lower than inflation for more than some time, because that starts to generate pressures that need to be resolved.”

On the last Friday in June, exultant after passing his landmark reform bill in Congress, Milei declared in a morning television interview that Argentina was entering the next phase of his monetary plan. Hours later, after markets closed, Caputo and Central Bank Governor Santiago Bausili sat before reporters at a press conference outlining a technical balance-sheet exercise, dodging questions on the peso. Benchmark sovereign bonds due in 2035 fell roughly 1.1 cents on the dollar the following Monday. 

“The markets had a different question, and they didn’t answer it,” said Juan Manuel Truffa, director of economic consultancy Outlier.

With a slow crawl and a weakening parallel exchange rate, the FX gap is only widening. An artificially strong peso has consequently slowed the government’s efforts to build its foreign reserves, pushing some on Wall Street to lament Milei’s unwillingness, for now, to adjust his currency policy.

So far this month, Argentina’s sovereign bonds are among the worst performers among their emerging-market peers, according to a Bloomberg index. They’ve still delivered investors returns of 39 percent since Milei took office late last year.

Monthly dollar purchases, a key metric for fixed-income investors, topped US$2 billion through May, but the central bank went into reverse and sold US$84 million through June 28. This month, however, has seen a pickup, with authorities buying some US$120 million through Wednesday, according to government data.  

“There’s really only one reason we care about Argentina rebuilding reserves and that is for them to be able to service their foreign debt. There is a lot of it outstanding too,” said David Austerweil, deputy emerging markets portfolio manager at Van Eck Associates Corp.  

Meanwhile, the chances of fresh funds from a potential new International Monetary Fund programme look just as slim as when the idea was first floated earlier this year as a way to help lift currency controls. And in 2025, Milei will face midterm elections in which he’ll need to gain legislative support.

Caputo, at the June 28 press conference, signalled the government would freeze electricity and gas tariffs — contradicting a senior energy official who outlined monthly price hikes just three weeks earlier. Energy bills for the middle class nonetheless more than doubled in June.