The Argentine economy faces a long (almost endless) list of problems that have plunged the country into an eternal crisis in recent decades. One of these problems, perhaps one of the most serious, is inflation. The speed with which prices are rising in Argentina generates great distortions that have a well-studied cost on economic growth and investment. For this reason, Javier Milei, President of Argentina, seems to be putting all his efforts into reducing inflation, a complex and painful mission that, however, is yielding some results. This disinflation process that began a few months ago could gain momentum after the significant reduction in taxes that will reduce the price of imports in Argentina. JP Morgan analysts believe that this reduction will allow the monthly CPI to gradually move closer to 3% monthly. to eventually reach 2%, compared to 4% currently. All this also coincides with a nascent improvement in real-time “macro” data and with the popularity of Milei.
After freezing the issuance of pesos to finance the public deficit, restructuring the central bank’s balance sheet, announcing and implementing a historic austerity plan (achieving successive budget surpluses) and launching a battery of measures to deregulate the economy (thus promoting investment), the Milei government has taken one last step to try to deal a major blow to inflation. The Argentine Minister of Economy, Luis Caputo, announced a week ago that the import tax, known as PAYS taxwas to be lowered from 17.5% to 7.5%. This decision could contribute to significantly reducing the price of imports, which should help to curb inflation, which has taken a still insufficient path of moderation.
Inflation is the top priority
Milei’s main priority is to drastically reduce runaway inflation, which reached 26% per month after the devaluation of the peso last December, but which It has since been reduced to 4% in Julylatest data released. Milei’s plan to control prices is working, but it is also true that his austerity measures to achieve a balanced budget have led the country’s economy into a recession announced by the president himself. This is the price to pay to end chronic inflation. However, Milei’s popularity seems to remain at high levels, which allows him to continue making difficult decisions, but aimed at reorienting the country’s economy. These decisions range from transferring part of the country’s gold abroad to obtain credit and repay the debt to freezing pensions or ending transfers to the provinces, which has caused some revolts in the country, for now measured and controlled.
From JP Morgan They estimate that the 10 percentage point reduction in the PAIS tax on imports of goods and services will help strengthen the disinflation trajectoryafter inflation was rigid, around 4% monthly, in July and (probably) August. “In our estimates, the monthly (one-off) impact on the CPI basket of the PAIS tax cut will be 0.6% to 0.8% percentage points, which will help boost disinflation, while achieving monthly inflation rates below 2% in the middle of the network. Capital controls remain a challenge,” the economists at the American bank estimate.
“The Milei administration has signaled that the top priority at present is to accelerate the pace of disinflation, ahead of any other policy objective (including reserve accumulation). Compliance with the fight against inflation is an essential condition for maintaining popular support, “The current administration’s main asset in a context of weak representation in Congress. In this context, monitoring the evolution of government confidence indicators becomes extremely important for the success of Milei’s administration,” they say at JP Morgan.
Support for Milei grows again
Well, the government confidence index published by the Di Tella University (a good indicator of government approval) rebounded in August, increasing by 3.4 percentage points to 50.8%, after falling by 1.8 percentage points the previous month. Compared to December 23, the index has decreased by 6.4 percentage points, but it is higher than the levels observed for Alberto Fernández and Cristina Fernández de Kirchner when they were in the eighth month of their respective terms, and in line with what was observed at the time. by the Macri administration, which highlights strong resilience in the context of fiscal adjustment and the slowdown in activity occurring in the first half of 2024.
Argentines seem to have begun to give more importance to lowering inflation, even if this implies some restrictions. Just as Germans have for decades shown a strong aversion to inflation, because they are very aware of the The period of hyperinflation in the Weimar Republic occurred between 1921 and 1923.Argentines appear to have a high tolerance, despite recent periods of very high inflation. However, this appears to have changed in recent months, allowing Milei to implement these tough policies without suffering serious consequences in terms of popularity. Milei’s ability to deliver on his agenda will likely depend on how long this support lasts.
Some positive notes on the economy
Moreover, the consumer confidence indicator appears to be showing an upward trajectory from the lows seen in January 2024, in line with the recovery in real wages. In fact, Consumer confidence rose 6% month-on-month in August and 16.5% month-on-month from January lows. That said, this figure remains 7% below the historical average. “Interestingly, the cyclically adjusted government confidence index (i.e. the ratio of government confidence to consumer confidence) remains near the highs of record series dating back to 2003 (excluding the covid-19 period) and well above the historical average,” according to the JP Morgan report.
Additionally, some leading economic indicators began to show signs of improvement in July. This does not mean that the economy is in full recovery, but it may be a sign that the economy has already hit bottom. Economic activity could have grown by 0.8% in July compared to last monthas revealed by a private Argentine analysis house. “Among other leading indicators, imports and electricity consumption are on the rise,” says economics professor Adrián Ravier. Both indicators would reflect the recovery that real wages are experiencing in Argentina. Luis Caputo, Minister of Economy, assured this week that the economy has begun to recover and that indicators such as GDP or consumption will soon demonstrate this. That remains to be seen.
Despite the optimism and the “scent” of change, the outlook for 2024 remains bleak: GDP is expected to contract by 3.4% for the full year (to grow by 4.6% in 2025). On the other hand, the country’s tax cut is likely to generate stronger demand from importers at the official exchange rate (an inflated exchange rate), which will likely put pressure on reserve accumulation in the coming months.
