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Libertarian Argentine president to unleash shock therapy amidst fiscal crisis

file photo: inauguration of argentina's president javier milei in buenos aires
Argentina's President Javier Mile during his swearing-in ceremony, in Buenos Aires, Argentina December 10, 2023. REUTERS/Agustin Marcarian/File Photo

Argentina libertarian economist Javier Milei took office on Sunday warning in his maiden speech that he had no alternative to a sharp, painful fiscal shock to fix the country’s worst economic crisis in decades, with inflation heading towards 200%.

“There is no alternative to a shock adjustment,” he said on the steps on Congress after taking the presidential baton and sash, with crowds of supporters cheering despite Milei saying the economy would worsen in the short term. “There is no money.”

Milei, 53, a former TV pundit who shot to fame with expletive-ridden tirades against rivals, China, and the pope, is taking over from Peronist leader Alberto Fernandez, whose government was dogged by failures to rein in soaring prices.

“The outgoing government has left us on track towards hyperinflation,” Milei said. “We are going to do everything we can to avoid such a catastrophe.”

While the speech was light on details, he said key steps would include a fiscal adjustment equivalent to 5% of the country’s GDP through cuts that he said would fall on “the state and not the private sector.”

The wild-haired outsider marks a major gamble for Argentina: his shock therapy economic plan of sharp spending cuts has gone down well with investors and could stabilize the embattled economy, but it risks pushing more people into hardship with over two-fifths already in poverty.

However, voters – who drove Milei to victory in a November run-off against a ruling Peronist coalition candidate – have said they were willing to roll the dice on his sometimes radical ideas that include shutting the central bank and dollarizing.

“He is the last hope we have left,” said 72-year-old doctor Marcelo Altamira, who slammed “useless and inept” governments for years of boom-bust economic crises. The outgoing Peronist government, he said, “had destroyed the country”.

BOOM AND BUST

The challenges are huge. Argentina’s net foreign currency reserves are estimated at $10 billion in the red, annual inflation is 143% and rising, a recession is around the corner and capital controls skew the exchange rate.

Argentina has gone through boom-bust cycles for decades with money printing to fund regular deficits stoking inflation and weakening the peso. That has worsened in recent years as reserves have dwindled with a major drought earlier this year hitting main cash crops soy and corn.

If not tamed, inflation could reach 15,000% annually, Milei warned in his speech, pledging to “fight tooth and nail” to eradicate it. He also warned about a $100 billion debt “bomb”.

The major grains exporter needs to revamp a creaking $44 billion loan program with the International Monetary Fund (IMF), while Milei needs to navigate ties with important trade partners China and Brazil, whom he criticized during the campaign.

Milei takes over from unpopular outgoing center-left President Fernandez, but will need to negotiate with rivals as his libertarian coalition only has a small bloc in Congress. He has allied with the main conservative grouping.

That has already had an impact. He has moderated his tone in the last few weeks, packed his first Cabinet with mainstream conservatives rather than ideological libertarian allies, and on Sunday he did not mention dollarization in his speeches.

Later in the day he took action to make good on one campaign promise, announcing in a post on X that he had signed a decree to slash the number of ministries by half, from 18 to nine.

The move evokes one of Milei’s most memorable moments as a candidate, when a video went viral on social media showing him tearing down sticky notes with the names of ministries he aimed to close, angrily shouting in Spanish “afuera” – out with you.

Argentina will also remain part of the Paris Agreement on climate change, Milei’s new climate diplomat told Reuters on Sunday, despite his past comments that global warming is a hoax.

The moderate tilt has buoyed markets and reassured voters.

“I think he will do well. For legal and Congressional reasons he’ll end up having to focus on more coherent things,” said Laura Soto, 35, a restaurant employee in Buenos Aires.

She said some more radical social ideas he had talked about during the campaign were also unlikely to happen, including easing regulation on guns and reopening the debate on abortion, which was legalized in Argentina three years ago.

‘CHANGE WAS NECESSARY’

To fix the economic mess, Milei has chosen mainstream Luis Caputo to helm the economy ministry, with a close Caputo ally Santiago Bausili as the central bank chief.

Milei and Caputo are expected to lay out a more detailed economic plan early next week, which will focus on reducing spending and closing the fiscal deficit.

“We are going to put the country back on its feet and make Argentina great again,” Milei said in a later short address to supporters from the presidential palace balcony, echoing former U.S. leader Donald Trump’s slogan.

“It’s the end of the populist night and the rebirth of a prosperous and liberal Argentina.”

The ceremony’s guests included Ukrainian President Volodymyr Zelenskiy, who is expected to meet with Milei, Hungarian Prime Minister Viktor Orban and a U.S. delegation.

Right-wing former Brazilian leader Jair Bolsonaro also attended, as well as Uruguay’s conservative leader Luis Lacalle Pou. Chile’s leftist President Gabriel Boric was also present, but leftists Luiz Inácio Lula da Silva of Brazil and Mexican Andres Manuel Lopez Obrador were some of the major absences.

In a sign of challenges ahead, state energy firm YPF hiked petrol pump prices this week by an average of 25%, with analysts and markets anticipating a sharp devaluation of the over-valued peso currency shortly after Milei takes office.

“We know in the short term the situation will worsen but then we will see the fruits of our efforts,” Milei said. “We don’t seek or desire the tough decisions that will need to be made in the weeks ahead, but unfortunately we have no choice.”

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