Milei’s first four months
In our previous monthly report, we used the reference to the movie “The Matrix” to conceptually illustrate the costly process of “awakening” an economy from its unsustainable macro policies. The economy would be awakened to a reality that is fiscally and monetary more sustainable, with better investment and growth perspectives, less prone to cyclical and impoverishing depressions, but also with a smaller “welfare state”—more competitive and less protective of shocks, and, one could say, more "real". After long-standing interventionist periods, which to a great extent isolated Argentina not only from investment flows (real and financial), but also often from applying best practices in its “production function”, and with a society accustomed to state intervention in economic matters, Milei is seeking to reverse the situation. But this implies costly social changes.
In this report, after Milei’s first four-month period in administration, and taking advantage of the recently published quarterly/half-yearly data from INDEC, we will try to quantify those costly processes to get a rough sense of the economic benefits vs the social costs on which these much-needed reforms are being built. The objective is to present some key macro indicators to help answer some of the questions that are paramount in Argentina today: Will society show resilience to the fiscal and monetary adjustments? Will inflation continue to drop? When and how will the economy recover? Is a V-shaped recovery likely, or even possible?
In the meantime, of course, the government will continue to focus its efforts on reaching deadline for signing the new social contract, the May 25 Pact, with the best possible political support to try to push its reform agenda through Congress. This will also depend on Milei's maintaining, over the coming weeks, the social support he currently enjoys.
Our report is divided into three main sections: the current impact on GDP and activity, the fiscal adjustment process, and a review of monetary policy.
The government is implementing an astonishing fiscal as well as monetary adjustment process. In this process it has surpassed most expectations, but at the cost of income and wealth reductions. Milei is taking advantage of his “political honeymoon” to implement otherwise very costly decisions. If he manages to get the needed support in Congress to press forward with his reform process, despite his minority position, his strategy should work out.
For now, despite some of the caveats we point out in this report, in the short term his path seems free enough.
Now read on...
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