Will April showers bring May flowers?

April, the cruellest month according to T.S. Eliot, saw the death of Pope Francis but also the economy entering into unfamiliar territory with the more flexible exchange rate accompanying the agreement with the International Monetary Fund (IMF), despite the huge bolster given Central Bank reserves by the US$12 billion of the total US$20 billion frontloaded. The formula improvised by President Javier Milei to make his 2023 campaign insults of Pope Francis compatible with his respectful presence at his papal compatriot’s funeral in Rome last weekend was to imply that he has honoured the late pontiff by reducing poverty from over 50 percent to under 40 percent in the course of his first year, paradoxically parallel with his “chainsaw” austerity drive, but no coincidence in libertarian eyes. That boast will now hinge on the course taken by the partially freed dollar and its price impacts since progress against poverty has largely been on the back of relief from the “inflation tax.”

Critics of the exit from the ‘cepo’ currency and capital controls argue that it opens the door to those speculative peso-dollar shuffles known locally as “carry trade” or the “bicycle.” Whether or not they are right will go much further towards defining the outcome of the October midterms than any cultural battles. The prophets of doom are more challenged at the purely monetary level because the new freedom of the dollar to float between 1,000 and 1,400 pesos means that it can move either way so that the old certainties of constant devaluation dictated by constant inflation have now been replaced by a scenario where shifting between pesos and dollars can become a risky business in the event of the currencies moving in the opposite direction. But what could be a harder battle to win would be price rigidity following upward movements of the dollar – can decades of marking up be easily reversed? Yet sellers would price themselves more easily out of the market with less pesos in the economy as a result of ending the fiscal deficit and money-printing.

The other side of the coin to strengthening the peso is that Argentina has become far more expensive in dollars in the last year. Until the cepo exit, this had led to a general, if not universal consensus among economists that the currency was overvalued (for which Economy Minister Luis Caputo is now demanding an apology) but this has now been challenged by the dollar not approximating its upper band at any point. The reason for overpricing largely lies in structural economic inefficiencies resisting the natural pressures towards lower prices – while some libertarians love to blame a business establishment pampered by protectionism, Milei’s government must carry some of the blame here for keeping the tax burden (including farm export duties) relatively high in pursuit of their top priority of a fiscal surplus. Major structural reforms of the tax system (including federal revenue-sharing) and labour law alongside the deregulation diligently introduced by its minister Federico Sturzenegger lie ahead before these inefficiencies can be removed for a more normal exchange rate.

All this in the medium and long term but there are short-term urgencies even ahead of the spring midterms – especially the City elections in just a fortnight. The government in general (and Presidential Chief-of-Staff Karina Milei in particular) has taken an enormous gamble in seeking to displace its PRO competitors for votes right of centre in their Federal Capital stronghold now rather than in the 2027 mayoral elections – because the rift in that spectrum could hand victory to the Kirchnerite list of legislators headed by Leandro Santoro. Even if Santoro wins with considerably less votes than in his unsuccessful 2023 mayoral bid (very likely to happen, given the fragmented field of 17 lists), there is the danger of Kirchnerism being confirmed as the main alternative to Milei – a prospect which the government does little to derail with its electoral strategy of polarising in that direction. But it is also a prospect which takes away any sense of permanence in a fiscal surplus, a streamlined state or anything else achieved by Milei when viewed from abroad.

A glorious summer until the cryptocurrency blunder of Saint Valentine’s Day has since been replaced by uncertainty with various setbacks such as the botched Supreme Court nominations and inflation creeping back up in March – now the freer exchange rate has given rise to uncertainty on a much wider front which could go either way like the currency.