Miley brings a change? Argentina is coming out of recession

After a year in office of the controversial president Javier Millay, the economic indicators show considerable signs of improvement: first and foremost, economic growth of 3.9% was recorded, after three consecutive quarters of negative economic growth, i.e. contraction of the economy. In addition, Argentina has completed a full year of budget surplus, inflation has fallen and the peso rate on the black market is balancing against the official rate. The economic situation is still difficult, but the signs of recovery are strong, and public support for Miley is even on the rise.

Millay came to power when Argentina was in a particularly difficult situation: inflation rose at a dizzying monthly rate of 12.8% (211% annually) and a “double deficit” was recorded: the first was in government spending, when the government regularly spent more than it brought in. Argentina’s reputation as a borrower was particularly bad, and the “risk premium” on its bonds was 20% above the interest rate investors demanded for buying equivalent US bonds. This meant that the only way to get money was to simply print it – which naturally pushed inflation towards The second deficit was in the trade account, meaning that imports regularly exceeded exports which also devalued the currency, increased inflation and harmed economic growth.

“Local companies did not dare to make long-term investments”

“Argentina has known decades of continuous crises,” says Lior Spindel, Israel’s economic attaché in Argentina and Chile. These included nine different bankruptcies, a variety of hyperinflation events, recessions and in the past also military coups. A little over a year ago, it seemed that Argentina was on its way to the tenth bankruptcy in its history, and extreme hyperinflation especially due to government spending fueled by printing money. In such a situation, says Spindel, “people received salaries and immediately wanted to buy things, because the next day the money would be worth less. For investors, it’s a complex matter, because when money has no value and stability, it hurts the possibility of entering into large projects. Local companies also did not dare to make long-term investments.” .

Another problem, Spindel says, is that “Argentina was a very protectionist economy that blocked imports. In October 2022, it activated a mechanism that required importers to go through an arduous bureaucratic process that actually blocked imports. Israeli goods were stuck entering the country. We intervened at one point and managed to save $60 million worth of goods that way, but It prevents trade and investment.”

Against the backdrop of despair over the economic situation, the Argentines elected a radical president advocating an economic approach completely opposite to what Argentina has done so far. Millay cut 30% of government spending, closed 13 offices and fired 30,000 public sector workers. He reduced regulation, announced an easier tax regime for foreign investments, singled out government companies – and balanced the budget for the first time in 14 years. The social cost was severe: pensions were cut, subsidies were cut, the public works that served as a kind of welfare system for hiring workers were canceled, university budgets were cut, a state television channel was closed and support for organizations to fight poverty (which Milley accused of “poverty management”) was stopped. The poverty rate jumped from 42% to 53% of Argentines in the first half of 2024.

The lowest inflation in four years

But recently, signs are beginning to mount that Millay’s radical economic policies are working. The first is the reduction of inflation: in the first month of Millay’s term, inflation even rose to 25% per month due to cuts in subsidies for consumer products, but since then inflation has gradually decreased to only 2.4% per month, the lowest recorded in Argentina in four years. This is indeed a very high inflation by the standards of a normal country, but for Argentina it is a particularly encouraging figure. In addition, after three consecutive quarters of negative growth, Argentina registered a quarter of positive and impressive growth (3.9%), which takes it out of the official definition of a recession. The negative growth was partly due to the very cuts, because government spending is counted in the national product and it doesn’t matter if they are effective or not.

But now, especially against the background of the decrease in inflation and a consistent increase in real wages that can be seen starting in February 2024, it seems that the Argentine economy is growing, mainly due to an increase in private consumption and investments – which has been particularly difficult to attract until now.

The rate of the peso against the dollar also made headlines last month, when the rate on the black market synchronized with the official rate. To prevent the flight of dollars due to excess imports, Argentina sets an official government exchange rate that artificially strengthens the peso. But in practice, the peso is traded for a “blue dollar”, i.e. an unregulated black market, which is usually regarded as the real market price of the peso. The gap between the two rates was over 100% on the eve of Millay’s inauguration, meaning that twice as many dollars could be bought on the black market as compared to the official rate, for the same amount of pesos.

A dramatic devaluation in the first month of Millay’s presidency, a constant devaluation of 2% each month, and the strengthening of the unofficial exchange rate against the dollar in recent months resulted in the difference today being less than 8%. On certain days in December, the gap even approached only 3%. This situation brings Argentina closer to the possibility of releasing the official currency rate to the free market, which will make it easier for it to trade with the world and export its products.

“The IMF expects a comeback”

“There is growing confidence in the Argentine government and the measures it is promoting,” says Matan Lev-Ari, until recently Israel’s representative at the Inter-American Development Bank. “The IMF predicts a comeback, including 5% growth in 2025. Argentina’s main stock index has also recently enjoyed dramatic gains, and Argentina’s risk premium has dropped from 20% to 8%.” According to him, “the government is also taking many steps to increase investor confidence, such as dramatically cutting regulation and offering tax benefits and regulatory stability for 30 years for large external investors.”

Argentina is also enjoying a successful year agriculturally, after two problematic years of severe drought. “Argentina is a very agricultural country, it’s a quarter of exports, 10% of GDP. It’s a bit like Israel in the 1950s,” says Spindel. “It is a major exporter of soy, corn, wheat and meat – most of Israel’s imports are from there.” Mining is also a particularly promising sector, for example lithium required for batteries for electric vehicles, and Argentina is blessed with the world’s second largest deposit of it.

Another field is gas and oil: “In the Vaca Muerta area in Patagonia they found a huge deposit of oil and natural gas,” notes Lev-Ari. “The government was alarmed and pushed out every external company and created a government monopoly. But it is very inefficient, and out of a potential output of 1.5 million barrels of oil per day, only 300,000 are produced. But today they canceled all the restrictions and proposed the new investment regime, which has already brought in international players Big like Exxon,” he added.

Despite the encouraging economic data, the situation for Argentine citizens is still difficult. The real wage is indeed on the rise, but it has only now regained its level before Milley came to power. The severe cuts have damaged purchasing power, and many are forced to find additional jobs to “make ends meet”. Still, the hope that these steps are needed to improve the situation and to protect the economy is also gaining traction among average Argentines. This is reflected in public opinion polls, which show that even at the height of the cuts and even before the improvement in the economic situation, Millay maintained 46% support. And now, the percentage of support for it has jumped to 54%, compared to 44% opposition. In relation to a harsh austerity policy that hurt Argentines in the short term, this is a dramatic achievement in public opinion, which Miley will try to translate into a political achievement in the mid-term elections that will take place in Argentina in about a year.