Milei begins his presidency with a massive devaluation and brutal budget cuts

Javier Milei is president and he and his Economy Minister, Luis Caputo , have begun their work to try to fix the Argentine economy, and the first announcements have been quite impactful, although not completely unexpected. Let's analyze them one by one, with the related consequences.

• The official exchange rate goes from 366 pesos per dollar to 800 pesos per dollar , coming considerably closer to the unofficial exchange rate, the one on the streets, which is around 1000 pesos per dollar. The Central Bank has burned its reserves to defend the official exchange rate and this may be a line closer to reality. After all, if you want todollarize, that is, eliminate the peso, then you have to do it at a rate that is close to the real one. The effects of this choice will be a push from imported inflation , because overnight the prices of imported products will double, but also a push for the export of national products, which, in turn, will increase production on the one hand, but it too will lead to an inflationary push in the short term. However, the choice could not be postponed and the forced change was now absurd.
• Liberalization of imports . The register of authorized imports is closed, these are liberalized. This is a consequence of the devaluation of the peso. If the exchange rate is realistic, the Central Bank will no longer burn its reserves, or will do so to a much lesser extent, to repay imports, and these can be liberalized. This will allow Argentine companies to freely buy the equipment and materials they need, but consumption of imported goods will still collapse, because the price will more than double;
• Reduction of the public deficit : the deficit must fall by 5.2%, with a very high cut in public spending of 3% of GDP and an increase in taxes of 2.2% of GDP. The effect: a horse cure that will severely depress the economy in the coming months;
• Reduction of public contributions for transport and bills and cuts to ministries. The objective of the 3% cut in spending will be achieved with a cut in subsidies for bills and transport, a method of the Peronists to win social support and a cut in ministries, invited to save or sharply cut spending. The consequences will be social and for some very harsh, with a wave of greater poverty;
• Increase in PAIS and advance taxes on exports : From a revenue perspective, taxes on the purchase of foreign exchange (PAIS) will be increased and exporters will have to advance taxes on exports themselves. Consequences : the devaluation of the peso will give a strong boost to exports, and this risks removing goods from the domestic market, especially food. Therefore, both to raise cash and to limit this outflow, it is obliged to advance export taxes. Similarly, to avoid excess imports, the tax on the purchase of foreign currency is increased, however making imports even more expensive.
• De-index the economy : the goal is to decouple the economy from future inflationary expectations. All these measures will result in a wave of inflation in the short term, with salaries melting in the sun, but the economic shock should, according to the government's plan, allow inflation to be contained in the medium term.
• Defined increases in social assistance : given that in the short term inflation will go from 8.3% monthly to 30% monthly (be careful, monthly, not annual…). So certain basic social benefits, such as food cards, will be increased. Pensions will also be increased, but on a one-off basis.

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The article Milei begins presidency with massive devaluation and brutal budget cuts comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/milei-incomincia-la-presidenza-con-una-massiccia-svalutazione-e-tagli-brutali-al-bilancio/ on Wed, 13 Dec 2023 09:00:49 +0000.