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ARGENTINA | 28-06-2024 09:22

Milei wins approval for bold economic reforms in Argentina

Argentina’s Congress approves President Javier Milei’s signature pro-business reforms, marking an inflection point for the outsider to govern with a hostile political class he continues to rail against.

Argentina’s Congress approved President Javier Milei’s signature pro-business reforms, marking an inflection point for the outsider to govern with a hostile political class he continues to rail against.

The Chamber of Deputies passed a sweeping bill, known in Spanish as the 'Ley de Bases,' early Friday in a final 147 to 107 vote. The biggest victory came minutes later, however, when lawmakers also approved the return of income taxes in the accompanying fiscal package by a narrower 136-116 margin, reversing the Senate’s bid to undo the measure. The extra tax revenue would give the government breathing room to reach its fiscal targets and help tame 276 percent annual inflation. 

Milei’s nascent libertarian party holds less than 15 percent of seats in the lower house, making legislative support his Achilles heel. The passage of his sprawling reform package, albeit significantly watered down, after six months of arduous negotiations sends a business-friendly message to investors that he has the political backing to get Argentina’s basket-case economy back on track.

The bills, which deregulate vast swathes of the economy and boost government revenues, were approved by the lower house in April then narrowly passed in the Senate earlier this month after additional changes. The package had to return to the Chamber of Deputies for final approval before becoming law.

Investors and the International Monetary Fund were keenly watching whether lawmakers could save the tax chapter of the fiscal bill after senators attempted to remove it. Its passage means Milei “has some willingness and ability to compromise with the political establishment,” according to Marcelo García, Latin America director for at New York-based consultancy Horizon Engage.

“Investors and the IMF would want to see more of this in the second half of the year, and hopefully at a faster pace,” he said by text message early Friday.

The fiscal measure lowers the taxable income floor, which the previous government raised on the eve of the presidential election last year to exempt almost all payroll employees. Alongside an incentive for Argentines to declare their taxable assets held abroad, the measures will inject the equivalent of 0.6 percent of gross domestic product into Argentina’s economy, according to Buenos Aires brokerage Portfolio Personal Inversiones. 

The market-friendly reforms cut red tape across Argentina and grant Milei emergency executive powers. A labour chapter makes it easier for employers to fire workers without fear of costly lawsuits and extends companies’ trial period for employees. Another measure provides tax breaks and lays out predictable ground rules for foreign investments in key sectors like mining. The proposal also broadly deregulates the oil and gas sector, which has historically faced strict export quotas.

While the market had largely priced in the passage of the main bill, the tax increase was a question mark because of the political cost it implied amid a deepening recession. But even with the legislative win on the books, left-wing Peronist lawmakers have threatened to challenge the tax in court because they argue the measure was technically vetoed by one of the chambers.

Protests outside Congress remained calm as night fell Thursday, limited to a handful of social movements. The country’s largest labour unions sat out the demonstrations to avoid the violence unleashed in the previous round of votes. Protesters had lit a car on fire and tossed Molotov cocktails at riot police, who responded with tear gas and a water cannon.

 

Watered down

The 200-plus-article bill has been significantly scaled back from the version Milei introduced upon taking office, which included more than 600 articles. The original proposal, for example, would have privatised dozens of state firms but both chambers watered it down to just a handful, excluding both oil company YPF SA and air carrier Aerolíneas Argentinas, among other changes.

Final approval of Milei’s reform plans helps validate the president’s decision to tap Guillermo Francos, a career politician, as his new Cabinet chief to negotiate support and concessions for the legislation. The president fired Nicolás Posse as Cabinet chief in May, marking the highest-level departure from the government since its December 10 inauguration. 

In a sign of thawing tensions, the government handed hundreds of previously halted public works projects over to the provinces so they could restart them, although funding assurances are less clear. Milei is gearing up to sign a pact with the nation’s governors laying out the framework for Argentina’s future on July 9, the country’s independence day.

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by Manuela Tobias, Bloomberg

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