Milei Opens a New Era: What Comes Next in Argentina Policymaking

(Bloomberg) -- Javier Milei’s victory in Argentina’s presidential election opens a new and uncertain chapter in the South American nation’s convoluted history.

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While Milei has been careful in his first words as president-elect, appearing moderate and extending an olive branch to whomever wants to join his political project to “rebuild” Argentina, the country doesn’t have time to lose. With inflation expected to exceed 180% by year’s end, contracting activity and no international reserves at the central bank, the risk of the economy spinning out of control is growing.

Here are four key issues to watch after the victory of the libertarian outsider:

1. Transition

While the new president will take over in less than three weeks, that’s an eternity for the famously volatile politics of South America’s second-largest economy. After months of tightening capital controls to extreme levels, a devaluation of the Argentine peso is all-but certain as the parallel rate is trading at almost a third of the official currency.

The risk of a political vacuum until Milei’s inauguration on Dec. 10 is real and speculation at Economy Minister Sergio Massa quitting following his defeat Sunday were an early indication of policy void. Massa said as much when he appealed to Milei to talk to outgoing President Alberto Fernandez to ensure a calm transition, appearing to relinquish his duties as economic czar.

Milei, who doesn’t have executive experience and only served as a national legislator for two years, will face an early test in striking a balance between working to secure the most orderly transition possible while avoiding responsibility for the government’s final days.

In the meantime, Fernandez, who has been mostly absent in recent months as his ally Massa contested the presidency, would be more than delighted for Milei to shoulder even some of the fallout from the expected volatility ahead, something the president-elect seemed to acknowledge in his victory speech.

The current administration “needs to take charge of its responsibility until the end of the mandate,” Milei said.

On Monday morning, the president-elect confirmed he will meet with Fernandez but without specifying when the encounter will take place.

What Bloomberg Economics Says

“The lead-up to Milei’s Dec. 10 inauguration could be rocky. The outgoing administration can still tinker with the currency, reserve levels and public spending. Markets will pay close attention to his cabinet announcements. Asset-price moves — especially in the parallel exchange rate — could help shape the near-term inflation outlook.”

— Adriana Dupita, Latin America

— Click here for the full report

Read More: Milei Vows Swift Measures to Pull Argentina Out of Crisis

2. Government Coalition

Milei’s biggest political challenge will be his lack of support in congress, where his party only counts a minority of senators and a fraction of lower house representatives.

Milei will have to use the next three weeks to draw up a new budget for 2024 and emergency measures that would be palatable enough for congress to pass right away if he wants his presidency to start on the right foot.

Sunday’s stronger-than-expected result, with Milei achieving the largest share of a popular vote since Argentina returned to democracy in 1983, certainly gives the libertarian economist a clear popular mandate for change. The president-elect will be able to benefit from his alliance with former President Mauricio Macri, who quickly moved to support Milei after his pro-business coalition fell short in October’s first round.

Macri may be a winner from the election, since he has credibility with the incoming administration and may be able to wield influence over Milei. But his coalition is now likely to split, with the right-wing parties supporting Milei and the more centrist and leftist groups preferring to remain in the opposition. At the same time, Peronism is likely to enter a period of internal conflict and recriminations.

Milei’s ability to capture congressional votes within the more moderate elements of Peronism is likely to hold the key to governability early in his term.

3. Economy Team

Milei hasn’t yet signaled who his economy minister will be, and the selection of the most important cabinet minister will surely depend on how serious he is on the idea of dropping the peso and dollarizing the economy. What’s clear is that unlike the outgoing government, he will be seeking to appoint someone who’s ready to push ahead with drastic solutions from day one.

“There is no room for gradual measures,” the president-elect said Sunday.

An adviser close to Milei said that the campaign has been considering three economists who served in the government of Macri for the job: Federico Sturzenegger, Demian Reidel and Luis Caputo. Other names that have been floated include Guillermo Nielsen, a former finance secretary.

Yet pursing full-on dollarization where the peso is immediately ditched would be an obstacle for some candidates because it would mean ceding monetary policy, according to the adviser, who asked not to be named commenting on private discussions.

Where there is more certainty is on who will lead Argentina’s central bank: he plans to hand over its keys to economist Emilio Ocampo, Milei’s informal adviser on the dollarization program, so that he can shut it down, he told Bloomberg News in an Aug. 16 interview.

4. Shock Therapy

Milei repeatedly said during the campaign that if elected he’d kill inflation, which he linked to a “political swindle” in a message that resonated with Argentines — particularly young voters — tired of years of runaway prices.

He now needs to articulate a stabilization plan to meet those expectations, something the outgoing government refused to do for fear of the political consequences of shock therapy. Whoever can tame one of the highest inflation rates in the world is likely to receive a huge boost in popularity, create goodwill in congress and be in pole position to govern Argentina for two terms.

But even attempting to achieve that goal is likely to produce volatility and social tensions in the short-term, with his proposals for significant government spending cuts proving a drag on growth while posing question marks over his ability to govern in such circumstances. The more hard-left parties in Argentina didn’t waste any time in warning Milei that he will face fierce opposition on the streets.

“Any stabilization program aiming to successfully reduce inflation must address the consolidated public sector deficit as a whole,” JPMorgan Chase & Co. Analysts Diego Pereira, Lucila Barbeito and Gorka Lalaguna wrote in a research note Sunday, saying they expect Argentina’s economy to contract 3% next year on the back of the expected adjustment. “Milei’s policy template seems well aligned with shock therapy, both fiscal and monetary.”

--With assistance from Ignacio Olivera Doll and Manuela Tobias.

(Updates with Milei-Fernandez meeting in ninth paragraph, Bloomberg Economics section.)

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