It was a very bad summer for President Javier Milei. He needs to turn the page and hope for – and build – a better autumn, starting today. The President knows it and so he cancelled a week-long trip to Spain and Israel, scheduled for this weekend.
The problem is clear: suddenly, his government’s base scenario for 2025 seems in danger. The blueprint was as follows: get fresh cash from the International Monetary Fund to keep the peso appreciated, use the peso appreciation to continue lowering inflation, then profit from lower inflation to win the midterm elections. Then, with more political strength, lift the foreign exchange market restrictions (aka the “cepo”) and kickstart a virtuous cycle of investment and growth for the last two years of his first term. This roadmap, at least on paper, should catapult Milei to re-election in 2027.
Don’t rush, there are roadblocks. Inflation, for starters, has been stuck in the same territory, around 2.5 percent, for five months now. The government had hoped that by the end of the summer, as the electoral season begins, the monthly rate would be closer to 1.5 percent. This is particularly relevant for February, which hit 2.4 percent despite the monthly “crawling peg” devaluation already having dropped to one percent.
Inflation reduction is the government’s main achievement. In the Milei administration’s view, it is directly caused by having attained a fiscal surplus. Fiscal equilibrium is a major policy win, and the President should get credit for that. But the two main items that explain it are cuts in public works and retirement payments. The latter is causing massive protests this month.
The stubbornness of inflation is aggravated by the seeming unsustainability of peso appreciation. Many economists argue that beyond the fiscal results, inflation is decreasing because the price of the US dollar is artificially kept low. The macroeconomic result of that decision is that since mid-2024, the country has systematically spent more US dollars than it produces. As a result, the Central Bank is losing reserves and struggling to defend the value of the peso. Other variables are also suffering: the trade surplus in the first two months of the year was just US$369 million, compared to US$2.2 billion in the same period last year.
President Milei was right to stay home this weekend, if he is personally leading negotiations with the IMF. With the peso under pressure and markets demanding details of the new agreement, the time has arrived for Economy Minister Luis Caputo to deliver. It is not easy – Milei needs cash from the IMF to make it to the election without a devaluation, but the Fund’s bureaucrats do not want to transfer funds unless the exchange rate regime changes and the peso is given a more realistic value. A devaluation would mean inflation at least doubling in the coming months. Hard to explain to the public.
Milei will need to leverage the political capital he has built during his first year in office to unlock this situation. His early and explicit support of Donald Trump during last year’s US campaign and his special relationship with Elon Musk — who is emulating Milei’s “chainsaw” approach to government cuts in Washington DC — now needs to translate into concrete support for the country. Will it?
Congressional approval — or at least the absence of rejection — of Milei’s presidential decree authorising a new deal with the IMF could be the government’s first step toward turning the page on a poor summer, which notably included the reputation-crippling ‘crypto-gate’ scandal. Approval ratings already reflect the government’s concerns: the average of all polls circulating in the corridors of power shows Milei’s support at 45 percent, the second-lowest score since he took office in December 2023.
With a very weak system of political alliances, Milei relies almost solely on his popularity to advance his reform agenda. That popularity will allow his political fixers, led by his presidential chief-of-staff, sister Karina Milei, to secure the best alliances in each province for the midterm elections. Money will also play a role. Last week, we discussed how an electoral agreement with the governor of Chaco signalled a possible pattern. This week, Chaco Governor Leandro Zdero received a 120-billion-peso transfer from the federal government. Just don’t tell the IMF.
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