June 13, 2024
World Economy

Milei’s economic experiment is sailing dangerously close to the wind

Portfolio Personal Inversiones says the Merval equity index is up 80pc in dollar terms and the average return on Argentine bonds has been 70pc. Goldman Sachs and UBS warn that the snap-back rally is largely over, code for ‘take your profits and get out’.

“Global investors have given Milei the benefit of the doubt that Argentina may not have to default after all. They were pricing in a 30pc return on debt restructuring and now it is around 48-50pc,” said Claudia Calich, head of emerging markets debt at M&G. 

“What he has done on a cash accounting basis is remarkable, so hats off to him. But that alone is not enough to bring boom times. We haven’t seen the recovery in foreign direct investment,” she said. 

Indeed not. The Argentine economy is close to cardiac arrest. The industrial collapse in March was hair-raising: cars -24pc, metals and machinery -37pc, furniture -40pc,  steel -42pc, and tarmac -69pc. 

“Never since they started measuring the data has there ever been such a fall across the board, not even during the pandemic,” said research group Fundar.

This is what happens when you cut off funding for 2,000 public infrastructure projects, cut fiscal transfers to the regions by 98pc, stop paying state debts owed to private contractors, and cut pensions in real terms by two fifths.

“Public works are practically paralysed. We expect 100,000 people to be laid off, and each one of them hits a whole universe of other people,” said Gustavo Weiss, head of the Chamber of Construction.

The recession itself is now shrinking the tax base, causing a 13pc fall in real tax revenues in April. In a fit of libertarian rapture the president chose this moment to urge business leaders to evade taxes if they could get away with it.

“The dodgers are heroes who know how to escape the claws of the state. If you buy dollars on the black market, even better, because then you don’t have to pay a lot of stupid fees,” he said.

Unless the economy hits bottom soon and Argentina starts to feel the rocket thrust of Milei’s V-shaped recovery – so far looking like a stretched U at best – this fiscal overkill could start to become self-defeating, setting off a vicious circle of rising deficits requiring yet further cuts akin to the waterboarding of Greece a decade ago.

“We’re heading into an economic depression,” said Carlos Rodriguez, a Chicago school monetarist and ex-rector of the Centre of Argentine Macroeconomic Studies.

“There is no economic strategy. The austerity plan is simply not to pay any money to anybody. There has been a brutal reduction in state spending that doesn’t seem to follow any logic. At some point the roads and the trains are going to fail,” he said.

“Milei came out like a rockstar and the people believed him. But his remedies are as old as the hills. If the plan is just to freeze public spending in nominal terms, Milei is going to become the most hated man in the country,” he told La Nacion.

The second danger for Milei is that the exchange rate will blow up in his face. The peso is effectively fixed. A crawling peg slides by at 2pc a month but internal prices have doubled in the meantime.

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