© Reuters. FILE PHOTO: Argentina’s Minister of Economy Luis Caputo speaks to the press, one day after the inauguration of Argentina’s President Javier Milei, in Buenos Aires, Argentina, December 11, 2023. REUTERS/Agustin Marcarian/File Photo
By Jorge Otaola and Walter Bianchi
BUENOS AIRES (Reuters) -Argentina’s foreign exchange and grains markets were locked down on Tuesday as traders waited for the new government’s economic “shock” plan aimed at fixing the worst crisis in decades with triple-digit inflation and depleted reserves.
Economy Minister Luis Caputo will announce the measures after markets close around 5 p.m. (2000 GMT), the spokesperson for libertarian President Javier Milei, who took office on Sunday, told a news conference.
They are expected to include sharp cuts to state spending, a reduction of the size of the public sector and a potential sharp devaluation of the local peso. The currency is currently kept artificially strong by strict capital controls.
“The situation is critical with 45% poverty and 200% annualized inflation,” presidential spokesperson Manuel Adorni told a press conference. “We are heading towards hyperinflation and the objective is to avoid it.
He added the measures would be in “in-line” with Milei’s campaign pledges – where he often appeared with a chainsaw to represent his planned cuts – to avoid a “deeper catastrophe”.
On Tuesday trading in the peso in the official market was restricted, as it had been on Monday, with the central bank allowing trades only on a priority basis until the new measures are unveiled, a bank source told Reuters.
Argentina, a top exporter of processed soy oil and meal, and the no. 3 for corn, has also temporarily suspended its grains export register until the new measures are announced. Milei has previously pledged to eventually reduce taxes on the sector.
STOCKS AND BONDS ADVANCE
Milei’s tough fiscal rhetoric – with a new mantra “there is no money” – has buoyed markets since his election win, with the local S&P Merval stock index hitting a new record high on Tuesday and sovereign bonds up over 2%.
The key doubt is whether Milei, whose libertarian coalition is only the third largest bloc in Congress, can implement the sharp cuts needed to undo the deep fiscal deficit without pushing the South American country towards turmoil and unrest.
“The adjustment will be painful, and the path forward is laden with economic, political and social risks,” Fitch Ratings said in a report.
“Milei’s party has little representation in the legislature and controls no provincial governorships, alliances with more influential parties and power-brokers remain in flux, and the social situation is fragile.”
Analysts polled by Reuters expect the official exchange rate to weakened sharply in the near future to around 650 per dollar, from around 365 currently. In parallel markets dollars trade for closer to 1,000 pesos.
The central bank’s new leadership was also confirmed overnight in the official gazette, formalizing the appointment of Santiago Bausili, a close ally of Caputo, to replace outgoing bank president Miguel Pesce.
The presidential spokesperson also said on Tuesday that Milei had already started cutting the size of government, with the number of ministries halved to nine, as well as sharp reductions in the number of secretariats and departments.
