Buenos Aires (Reuters) – Argentine President-elect Javier Miley won a tightly contested election. Now comes the hardest part: dealing with economic crises.
Inflation has reached 143%, net foreign currency reserves have fallen to a deep low, savers are abandoning the peso, and a recession is looming – if it has not already arrived. Four out of ten Argentines live in poverty and a sharp decline in the value of the peso is likely.
Miley, who pledged to treat the economic shock such as the closure of the central bank and dollarization, won the second round of voting on Sunday with about 56%, competing with Sergio Massa, who received 44%.
Miley now faces the enormous challenge of transforming the economy once he takes office on December 10. Failure could result in the already beleaguered country suffering a tenth sovereign debt default, escalating poverty and potential social unrest.
“It’s an economy in intensive care,” said Miguel Quigel, a former undersecretary of finance at the Economy Ministry in the 1990s.
Economic inflation
Argentina’s high inflation rate creates huge distortions in markets and for consumers, with prices changing weekly. A poll conducted by the Central Bank of analysts expected that inflation would reach 185% by the end of the year.
“One of the biggest challenges facing the next administration will be correcting the relative price distortion that the economy is suffering from today,” said Lucio Garay Mendes, an economist at consultancy EcoGo.
“In the context of high inflation and the stabilization plan, a correction is inevitable.”
In an attempt to curb inflation, Argentina’s central bank raised its benchmark interest rate to 133%, which encourages saving in pesos, but hurts access to credit and economic growth.
Peso controls
The Argentine peso has been constrained by capital controls since the 2019 market crash, resulting in an unwieldy set of exchange rates, with the dollar trading at more than double the official level near $350 per dollar.
Common unofficial exchange rates include the “blue” dollar, the MEP, and blue-chip swaps, although over time demand for dollars through parallel channels has generated dozens of different rates including the “Coldplay dollar” and the “Malbec dollar.”
Miley has pledged to quickly roll back capital controls and eventually dollarize the economy, while a sharp devaluation of the currency in the near future is likely to bring official and parallel rates closer together.
Central bank reserves
Argentina’s central bank’s foreign currency reserves are near their lowest level since 2006, and in net terms, analysts widely see them as being in negative territory after a major drought hit exports of major cash crops such as soybeans, corn and wheat.
The decline in reserves threatens the country’s ability to repay debts owed to its main creditors, the International Monetary Fund and private bondholders, as well as to cover major imports. Argentina will need to revamp its crumbling $44 billion IMF programme.
The government has agreed to an expanded currency swap with China to help cover some of its costs, and has had to delay some payments to key trading partners such as Brazil.
recession
Latin America’s third-largest economy is on track to contract by 2% this year, according to the latest survey of central bank analysts, partly due to the impact of a recent drought that has halved corn and soybean crops.
Combined with triple-digit inflation, this is likely to worsen poverty levels, with two-fifths of people already living below the poverty line as salaries and savings erode.
Silver lines?
Argentina, rich in grains, shale gas and lithium, could see a boost next year as better rainfall helps harvests, a new gas pipeline reduces reliance on costly imports and increases demand for lithium needed for electric car batteries.
Soybeans and corn are expected to have much stronger yields, which will bring in much-needed foreign currency.
“The harvest will help bring a greater flow of income into the economy, as well as increase the production of (shale oil formation) Vaca Muerta,” said Eugenio Mare, chief economist at Libertad y Progreso.
(Reporting by Hernan Nessi and Iliana Raszewski – Preparing by Muhammad for the Arabic Bulletin – Preparing by Hernan Nessi for the Arabic Bulletin) Editing by Adam Jordan, Daniel Wallis and Chris Rees
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