Building Bridges: Milei’s Path to Political Agreement and Economic Reform in Argentina

2024-03-03 03:44:00
Milei also spoke to the markets: promise of zero deficit, structural reforms and political agreement Reuters

With his strong speech on Friday, President Javier Milei began to walk the arduous path towards a political agreement that would provide greater room for maneuver. Investors, who looked at Argentina again after many years, have already become convinced that the adjustment of public accounts is serious. But the doubts shared among Wall Street banks and investment funds refer to the low political volume of Libertad Avanza and the obstacles that this means to carrying out the reforms.

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The rocky start with Congress, particularly with a Base Law that had to be withdrawn due to the lack of agreement, only increased this uncertainty. The scant political support was expressed in a legislative majority that turned its back on him and in a group of highly combative governors. And not just the Peronists.

But concern grew even more on Wall Street when rumors began to circulate about the possibility of an impeachment trial against the President, although without much basis. At the same time, the possibility of a legislative rejection of the DNU at the end of December began to resonate. This requires both chambers to vote against, something that has never happened since this instrument existed.

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Yesterday’s speech clearly sought to build bridges of political negotiation, with a view to reaching a “May Pact.” In summary, the proposal is to insist on the approval of the Bases law, but at the same time offer the provinces a “fiscal relief” and at the same time the possibility of opening the discussion to a new federal co-participation agreement. The idea would be to put aside discretionary transfers by the Government, a practice that Milei has already stopped, and discuss on a real basis how tax revenues will be divided, a request long demanded by the governors.

The large investment funds once again looked at Argentina, but for now there are few who have dared to invest. That is why the possibility of a strong additional rebound in both bonds and stocks remains latent, in case the “big hands” of Wall Street increase their bet on Argentine assets.

The difficulties in achieving political consensus forced the Government to exaggerate with the fiscal adjustment, achieving a strong financial surplus in January, which will surely be repeated in February. But it is difficult to sustain such a reduction in the fiscal redundancy by liquefying retirees or at the cost of inflation that destroyed purchasing power.

Wall Street wants to see the chances of success of Milei reforms Reuters

Going forward, the “chainsaw” must necessarily gain prominence so that the reduction in spending involves reducing the size of the State. This was made explicit on Friday by Milei himself, who spoke of reducing his presence to only 25% of the GDP, that is, returning to the state of affairs prior to the Kirchner administration.

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Politics at all its levels (national, provincial, municipal) will have to move towards a historical adjustment. Otherwise, the libertarian project will founder. Without fiscal balance, the Government’s credibility would fall precipitously.

But other corrections will also be necessary that require legislative support. The most urgent is that of the current pension formula. If left as it is, the update of assets in June should largely reflect the inflation of the December-February period. That means a sudden improvement in pensions that would force a sharp increase in spending, shaking the fiscal balance.

It is possible that this change in formula is the most pressing thing that the Government must face in the coming months. And to achieve this, a broad political negotiation must be carried out.

The first to support the call for an agreement was the governor of Cordoba, Martín Llaryora, who had been having a series of strong exchanges with the President. He would now host the May Pact. But the leaders of provinces historically dominated by Peronism, such as Tucumán and Catamarca, also expressed their support for moving forward in negotiations.

Of course, the statement from the most important governor of Peronism, Axel Kicillof, is missing, who promised to give a response on Monday at the opening of the sessions of the Buenos Aires legislature. An energetic and very harsh response is discounted.

The May Pact, beyond 10 points with good intentions and almost impossible to refute, is an excuse to sit the governors at a negotiating table. Several Peronist leaders have already accepted the call, which would allow Milei to reverse the initial failure in the treatment of the Bases law

Mauricio Macri’s overwhelming support for the signing of the May Pact represented another key piece of information, amid rumors about a distance between the two. Thus, the idea postulated in public by Milei himself grows, who dreams of a center-right coalition to fight in next year’s legislative elections, led by La Libertad Avanza and Pro.

The President recognized that the economic situation is dramatic and preferred not to make big promises. He only referred to the fall in inflation which, he said, will deepen in the coming months, allowing the lifting of the exchange rate. “I ask for your patience and trust,” was the phrase that resonated.

February was a month of contrasts. The decline in economic activity and consumption deepened, but inflation had a significant drop (it would end up at less than 15%), as did the dollar. The exchange gap returned to levels of just 20% and Domingo Cavallo suggested that it is time for the Government to accelerate the adjustment of the official dollar to avoid an exchange rate delay.

The abrupt drop in financial dollars in February surprised the entire market. For Milei it is an indicator of an acceleration in the process of lowering inflation, which in February would remain below 15%. Furthermore, the President assured that the date to leave the trap is approaching, although he avoided committing to a date.

The roadmap until June consists of continuing to liquidate liabilities in pesos (a lowering of Central rates could be expected if inflation remains low), strengthening the Central Bank with greater accumulation of reserves and closing a new agreement with the IMF, possibly with the disbursement of fresh funds.

Although the harvest will not have the expected volume, it still comes with a significant increase in dollar income in relation to 2023. It is expected, therefore, that by mid-year the import regime will also be regularized, which today can be paid at 120 days in four equal and consecutive installments.

Exchange stability, the decrease in inflation and economic reactivation are central variables to consolidate Milei and give it additional impetus to successfully negotiate its package of laws. You have 90 days to achieve it.

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