No One But Him (Maybe)

Next Sunday, on December 10, Argentina's new president, Javier Milei, will officially take office, marking the end of the honeymoon period from his election on November 19 to the commencement of real work. The newly elected disturber of public peace faces an equal number of challenges and opportunities in overcoming them. While some may argue otherwise, claiming that the opportunities are significantly fewer, the country grapples with a severe and prolonged political crisis compounded by an economic collapse. Numerous challenges include fluctuations in the national currency, a commodity-driven economy, high crime rates in major cities, unemployment, and rampant inflation. Any politician would find these issues overwhelming, but not Milei. He boldly promises and doesn't appear to be someone who lacks belief in his own words. Ten days before his inauguration, he visits the U.S., engaging in active negotiations with both the Joe Biden administration and the IMF. He pledges a radical tax reform and the removal of unnecessary state regulations.

The primary question for Javier Milei is: why him? Because his predecessors, regardless of political preferences, gender, or military decorations, couldn't handle Argentina's escalating problems. And there are plenty of problems, notably the staggering inflation projected to reach 122% annually by the end of 2023. This means prices will double with a quarter added within a year. Over the past six years, inflation has steadily accelerated from 25.7% in 2017 to 72.4% by the end of 2022.

Now, one might wonder if Milei inherited an economic grow amidst the inflation. Not and not. In the previous five years, the economic situation barely flickered. 2018 and 2019 recorded negative growth rates, minus 2.6% and minus 2%, respectively. In 2020, everything is clear – a minus 9.9% due to COVID-19. However, for example, Poland, a country with a somewhat similar economic structure, only experienced a minus 2% in 2020, and before and after that year, it consistently demonstrated persistent growth. In contrast, Argentina struggled to compensate for losses in 2018-2020 in the following two years, but declined further this year.

"Don't Cry for Your Peso, Argentina"

Argentine peso? Better not ask, as it plummeted tenfold over the past five years – from 37.4 pesos per dollar to 363. And we haven't even begun to unravel whether this rate is genuinely reflective of the country's economy. There isn't just one, two, or three exchange rates. The 363 pesos per dollar is the official rate, so making by them it practically impossible to buy or pay for anything. The street cash rate is roughly twice as high – this is the cost of state currency market regulations in Argentina. It's almost comical – a year ago, a special "Qatari" rate was introduced, allowing Argentinians to purchase tickets and pay for reservations for visits to Qatar, where the FIFA World Cup was held.

All this exchange rate extravaganza was creatively developed by Milei's predecessor, Alberto Fernandez. Left oriented Fernandez introduced the capital outflow control system precisely to restrain currency outflow, preventing the peso from falling and thus holding onto power. But, as we can see, this monetary creativity didn't work.

Usually, the International Monetary Fund dislikes such games with multiple exchange rates, but not in Argentina's case. In August 2023, the IMF conducted the fifth and sixth reviews of Argentina's 30-month Extended Fund Facility (EFF) programme totaling $43 billion. The IMF team noted that key points of the program were not met. But the Board of Directors approved the reviews and immediately disbursed $7.5 billion. The seventh review of the program was supposed to take place in November, but it seems to have been postponed due to the change in leadership.

So, is Argentina an extremely poor country if things are so dire? Not at all. The GDP per capita in Argentina is approximately $13,700. This is about one and a half more than neighbouring Brazil ($8,900). When compared to European countries, it's significantly more than in Turkey ($10,700), although considerably less than in Poland ($18,400) or Croatia ($18,400). But with a population of 46 million, Argentina's GDP is over $630 billion as of 2022, securing its place in the G20.

Speaking of the population, it's essential to mention its outflow. It's challenging to obtain accurate statistics, but it's known that a significant wave of emigration occurred due to the terrible economic crisis in the early 2000s, and it continues today, albeit on a smaller scale. This is partially offset by an influx of illegal migrants from neighbouring Bolivia and Paraguay. In essence, Argentina loses active and skilled individuals while receiving less qualified and poorer migrants.

This is the baggage Javier Milei has inherited. So, what is he to do with it?

PHOTO: Thousands of members of Argentine worker and civic movements demonstrate in front of the Ministry of Social Development of Argentina in protest against the policies of the new President of Argentina, Javier Milei, in Buenos Aires, Argentina, November 28, 2023. SOURCE: Getty Images

Winds of Change (Perhaps)

Some might argue that the issue lies with the people, but more likely, it's the institutions. If we start from Juan Peron, undoubtedly the most prominent figure in Argentine politics in the last 70 years, the country has witnessed four military juntas in power during this period. There have also been 13 military figures in the role of president over these 70 years, including Peron himself. Only two women have occupied the presidential seat, and both followed in the footsteps of their husbands. The first female president, and the third wife in line linked to the legendary Juan Peron, was Isabel Peron, who is still alive, by the way. She was the vice president and took over the country after her husband's death, losing her position due to a military coup. After that coup, from 1976 to 1983, Argentina had seven (!) generals as presidents.

The second female president was Cristina Fernandez de Kirchner, who triumphantly won the elections in 2007 after her husband served as president from 2003 to 2007. She also won the subsequent elections in 2015 and returned to the presidential palace in 2019 as vice president under Alberto Fernandez. Thus, she is closely tied to the current economic turmoil in the country. In fact, she played a significant role during her presidency by advancing a left-wing agenda. She created a taxation system for agricultural exports with export duties dependent on global prices.

Regular semi-socialist experiments disturbed the business sector and led the country into wild economic crises. Regular defaults arranged by Argentine governments frightened off investors with peso devaluations and encouraged them to invest during the downturns in Argentine assets. The intense economic crisis from 1998 to 2002 was accompanied by massive street upheavals in a Mad Max style. However, soon after the crisis, the economy compensated for the downturn, and investors even started receiving payments on external debts previously defaulted. All this against the backdrop of the fact that the share of agricultural production in exports almost constantly exceeds 60%, and the country, like Ukraine, is a global leader in the export of oilseeds, soy and sunflower oil.

These political-economic swings are destroying the future of a potentially very prosperous country. So, perhaps that's why Javier Milei dared to take the risk, steering it towards extreme libertarianism and ultimately free-market capitalism. However, it's not entirely clear how this policy will take root in the fairly rigid local soil saturated with a penchant for populism and leftist ideas.

PHOTO: Javier Milei holds a dollar bill with his face during the final rally before the second round of elections on November 16, 2023, as a sign of readiness to switch the country to the American currency and abandon the peso. Two weeks later, he abandoned this idea. SOURCE: Getty Images.

First Steps

Argentinians have chosen Javier Milei, a libertarian outsider, perhaps out of desperation. Miley admires former US President Donald Trump and Brazil's Jair Bolsonaro. He promises to cut state spending, shut down the Central Bank of Argentina, and adopt the US dollar as the national currency to tame inflation. His proposals were quite sensational, but it was an election campaign, and perhaps it's not worth dwelling too much on it. What's more interesting is what's happening right now, post-election but pre-inauguration.

Milei appears to be a true determined Argentine, with the majority of his supporters voting not so much for him but against the current status quo. It's the youth, his main voters, with whom Milei communicated through social media, that propelled him into the presidential seat. He's a typical disruptor, highlighted by the chainsaw he used as an electoral prop. In essence, the chainsaw was meant to symbolize his intent to drastically reduce the size of the state.

However, the election winner is far from a marginal figure. He's a renowned economist, and perhaps that will be his "silver bullet." But who will execute his grand strategies?

To overcome challenges, the majority in both houses of parliament would be a more effective tool than a chainsaw. But Milei doesn't have that instrument. The La Libertad Avanza party controls only 7 out of 72 senators and 38 out of 257 deputies. Moreover, Milei can't boast control over any provincial governorship or municipal team. His former rival, Mauricio Macri (was president from 2015 to 2019) and Macri centre-right Republican Proposal (PRO) party, might support the disruptive winner, but there are no guarantees.

Milei could seek support even among provincial governors aligned with Peronism, his sharp political opponents. This is possible, as regional leaders are usually pragmatists seeking compromises with the central government.

Milei himself has started signaling that he's open to compromises. He has already abandoned the idea of parting ways with the peso and eliminating the Central Bank of Argentina, which were key slogans of his campaign.

Instead of eliminating the peso, Milei promises "shock therapy," including sharp spending cuts and attempts to privatize some state-owned companies to avoid hyperinflation.

Javier Milei, in many ways, is consistent. He promised full cooperation with the United States – and his first visit was precisely there. He pledged unity with the "free world" and distancing from China, as he does not want "deals with communists." However, Miley already has softened his stance on China since the countries have close economic ties. China provides Argentina with every tenth dollar of export revenue, and currently, it is financing the country with tens of billions of dollars. By the way, Chinese corporations are already involved in lithium extraction and infrastructure projects in Argentina.

Yet, Javier Milei is still seeking a foothold in the US, and it seems he has found it, as Washington is increasingly concerned about Beijing's growing influence on Argentina's economy.

In late November, Milei met with National Security Advisor Jake Sullivan and officials from the National Security Council and the State Department, including Assistant Secretary of State for Western Hemisphere Affairs Brian Nichols. Additionally, Milei's economic advisor, Luis Caputo, and several delegation members held talks with the International Monetary Fund and the US Department of the Treasury.

He also promised not to join the China-led and Russia-backed BRICS group. This is a sharp change compared to his predecessor, left-centrist President Alberto Fernandez, who visited Moscow when Vladimir Putin was preparing to invade Ukraine in February 2022 and recently returned from a trip to Beijing.

Javier Milei's window of opportunity is rather small. It's more of a window leaf than a window.