Since assuming office in December last year, Argentina’s President Javier Milei has been confronted with an economic crisis of dauting proportions. Perhaps the most serious and immediate challenge Milei faced was getting inflation under control. In 2023, prices rose by over 200%, the most rapid rate of inflation Buenos Aires has seen for over thirty years.
The central bank has controlled the Argentinian Peso (ARS) and kept it artificially strong through strict capital controls, partly in a bid to keep down the cost of imports and ease cost of living pressures on Argentinians. Despite this, the economic costs have been severe. Approximately 40% of Argentinians are living in poverty, and the situation is only getting worse.
Milei was elected as he was seen to be offering some bold solutions to a desperate crisis. Describing himself as an “anarcho-capitalist,” Milei pledged to transform the Argentinian economy and finally solve the inflation problem. His agenda included moves such as the dollarisation of the currency and the abolition of the central bank that had failed to stop constant price rises.
The idea behind dollarisation in particular was to get inflation under control. The theory goes that when a country shifts from using a weak currency such as the peso, to a more stable currency of international trade, authorities are in a better position to ensure price stability.
For Argentina, which runs a sizeable current account deficit, dollarisation can also make dollar-priced imports cheaper, helping to ease inflationary pressures. The dollarisation programme in Zimbabwe in 2009 immediately worked to reduce inflation at a time when prices were rising by over two million percent.
However, this plan has not worked in Argentina. Milei soon found that his plan to replace the Argentinian Peso with the US dollar wasn’t viable as there simply aren’t enough dollars in the South American country. One of his main economic advisors, Emilio Ocampo, who was the leading advocate for dollarisation within the Milei camp, was soon shuffled aside for a more conventional pair of Wall Street veterans.
What was Milei’s back-up plan to fix a currency that he believes is worth “less than excrement?” He opted to devalue the currency by more than 50% and drop the central bank’s controls. The justification was that only a massive devaluation would bring the peso into line with its real market value. Indeed, the spread between Argentina’s official exchange rate and the black market rate has often been between 45 and 55%.
Milei and his advisors considered this to be a necessary form of shock-therapy for the Argentinian economy, but the results are already looking disastrous. In the immediate month after the devaluation, prices rose by an additional 50% compared to the month prior. That puts the country into hyperinflation territory.
Perhaps most concerning for the new administration in Buenos Aires will be that this new, hyperinflationary environment makes it very difficult for the government to exert any control over monetary policy. After all, when prices are rising by 200% or more, the currency has to be devalued time and again, which in turn causes even more inflation – creating a vicious circle of ever-increasing prices. This is the grim prospect which Argentina now faces.
Investors with exposure to Argentinian assets – particularly those denominated in pesos – should be taking this into account. The Financial Times recently reported that Milei’s dramatic appearance at Davos had won over private equity professionals, fund managers, international bankers, and even the International Monetary Fund (IMF), owing to the speech’s stridently pro-business message. JP Morgan’s second in command, the Argentinian Daniel Pinto, said that Milei was “addressing all the right things in the economy” and that his measures could bring “an end to 80 years of economic deterioration.”
None of this is any good, though, if Argentina gets trapped in a doom-spiral of hyperinflation. Uncontrollable price rises make it pretty much impossible to run an economy properly, let alone to create an attractive environment for business and finance. Milei and the government seem to have let the hyperinflation genie out of the bottle and they will have simply to hope they can somehow get it back in.
Author: Harry Clynch
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