You are right Tyler. Now [Milei’s chance of succeeding] it’s 51%. It’s a long way to October 2025 when the mid-term election will be the first test and much longer to October 2027 for the big test.
I think there are three critical issues for the first test. The first one refers to the unification of the foreign exchange market at a “free” exchange rate. As long as Milei continues his total commitment to a zero-deficit policy, the only threat to reduce inflation to “close” to zero later in 2025 is to avoid a big devaluation at a higher fixed exchange rate. There is a very important difference between Argentina today and any other past experiences in Argentina and elsewhere. That difference is the huge holding of dollar assets by Argentina’s residents (in this summer season they are buying cheaper goods and services in Brazil, Uruguay and Chile) . As many others I thought that initially Milei would buy those dollar assets by issuing bonds but he decided not to do that because he was afraid that there would be too much political pressure to spend the newly acquired international reserves (or sovereign funds). I expect he will shift to a unified market at a flexible rate in the next six months and the market rate to remain under 1,500 pesos per dollar at least until the mid-term election.
The second issue is the response of provincial governors and local authorities to their own deficits. So far Milei´s federal policies have implied larger deficits at those levels. Milei has been trying to negotiate with some governors and local authorities but it will not be easy to lower expenditures at those levels and they will try hard to get revenue directly from production in their jurisdictions. So Milei has to negotiate with the national Congress where he has few loyal members as well as with a lot of other politicians. And remember, contrary to many stupid and malicious statements, Milei has been negotiating within the law.
The third critical issue is the attraction of a large foreign investment in the first half of 2025. Milei has already set a framework for that to happen but he needs commitments soon because they will change expectations about the country´s ability to increase sharply export revenues (btw, despite all the blah, blah about Chile’s success, by far the main reason was the legal changes that in the early 1980s allowed a huge investment in copper between 1986 and 1995, more than duplicating production –yes, other reforms were good to increase the multiplier effects of that investment).
That is from EB-CH, a cranky guy but sometimes he has good points. There are (at least) two additional problems<:
1. First, a global recession could scuttle the whole thing on the revenue side.
2. Second, Argentina (not blaming Milei here, I think he understands this) has a tendency to give up on its adjustment programs too early. A temporarily balanced budget does not reflect how a tanking of commodity prices (combined perhaps with other problems) could lead to a future financial crisis once again. The fiscal configuration has to be not only “good enough for now” but truly stress tested. Is the political system down there strong enough to see that through? I suppose we will find out.
That is from EB-CH, a cranky guy but sometimes he has good points. There are (at least) two additional problems<:
1. First, a global recession could scuttle the whole thing on the revenue side.
2. Second, Argentina (not blaming Milei here, I think he understands this) has a tendency to give up on its adjustment programs too early. A temporarily balanced budget does not reflect how a tanking of commodity prices (combined perhaps with other problems) could lead to a future financial crisis once again. The fiscal configuration has to be not only “good enough for now” but truly stress tested. Is the political system down there strong enough to see that through? I suppose we will find out.