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Argentina’s economic crisis: whoever wins presidential election is on a collision course with the IMF

Javier Milei waving to audience as he steps down from podium
Radical conservative Javier Milei is ahead in polls to become next president. EPA

Argentina is heading to the polls on October 22 for a presidential election dominated by another profound economic crisis. In September, annual inflation in Latin America’s third-largest economy hit 124%, its highest since 1991.

This was after a devaluation of nearly 20% in the peso amid pressure on the government from major creditor the International Monetary Fund (IMF) to stop artificially propping it up. To curb the inflation, Argentina’s central bank raised the benchmark rate of interest to a horrific 118%.

The country is also in recession, fuelled by a three-year drought that has done much damage to agricultural exports. The harvest of soybeans, one of the nation’s biggest exports, is barely one-third of five years ago.

All this is exacerbating the cost of living crisis, which has already driven poverty levels above 40%.

Meanwhile, Argentina holds the unenviable position of being number one on the debtor list of the IMF, with US$44 billion (£36 billion) still outstanding from the US$57 billion loan signed in 2018.

There are also stringent currency controls that make it harder to move money out of the country, and has led to a black market in pesos whose value has also been falling sharply.

In mid-August, this crisis created the political space for anti-establishment congressman and economist Javier Milei to send shockwaves through the system by taking first place in the presidential primaries with 30% of the vote.

This put him just ahead of the two other leading candidates, Patricia Bullrich of the centre-right coalition (28%); and Sergio Massa, the economy minister of the current Peronist government (27.3%) (current president Alberto Fernández is stepping down).

Argentinians are weary of voting yet again for political parties from either side of the Peronist divide, who have been both dogged by corruption claims and failed to prevent numerous economic crises.

In contrast, Milei is a radical conservative with no political baggage and an endorsement from former Brazilian president Jair Bolsonaro.

The dollarisation debate

Two key dividing lines between the presidential front-runners are how to deal with inflation and the embattled peso. Milei’s answer is to dollarise the economy, meaning replacing the peso with the US dollar as legal tender.

He argues this would cure inflation and stop the central bank from printing more money, which it has relied on to finance public spending. Ultimately, he wants to do away with the bank altogether.

Milei has also promised to curb inflation by reducing state spending by up to 15% of GDP, partly by abolishing the public health and education systems. Bullrich denounces this 15% figure as a fantasy, though she too wants to tackle inflation by improving the public finances. She promises to curtail government spending by 4% of GDP.

Bullrich rejects Milei’s dollarisation plan as impractical, arguing the central bank would lose control over monetary policy and in any case has insufficient currency reserves to implement the plan. She proposes that both the peso and US dollar be legal tender, supported by an exchange rate mechanism that would guard against inflation.

Presidential debate including Sergio Massa (left) and Patricia Bullrich (right).
Leading contenders Sergio Massa (left) and Patricia Bullrich (right). EPA

To help drive economic growth, Bullrich wants to remove the currency controls – unlike Milei, who argues this would be hyperinflationary. She also wants to reduce and simplify taxes, incentivise businesses and foreign investors, and rebuild the central bank’s dwindling foreign reserves (though the government recently tightened the currency controls to try and bring this about).

As for Massa, he contends that Milei-style dollarisation would exacerbate inflation because it would be preceded by a very poor conversion rate from pesos to dollars that would make everything more expensive. He wants to stabilise the economy by expanding agricultural exports so that Argentina sells more than it buys. In his view, a competitive peso is essential to this.

The three candidates have more similar views on Argentina’s debt obligations. They all favour servicing the current debt without borrowing more while renegotiating elements of the IMF deal to align with their economic plans. The IMF has met with all three to discuss their economic policies.

Tax matters

Another big talking point is tax. There is much discussion between the candidates about export taxes, known as retenciones. These made a significant impact in 2002 when they were levied as emergency taxes to get the country back on its feet after the IMF debt default.

Retenciones can’t make such a difference this time because they never went away, accounting for 12% of the 2022 tax take. Nonetheless, Bullrich wants them reorganised into a savings scheme, with farmers able to draw from them at a future date.

Milei, who sees taxes as a form of state violence, promises to abolish them altogether.

Meanwhile, Massa recently announced a plan to remove the lowest band for income tax so that those earning less than ARS$1.7 million (£4,125) per month will pay nothing.

Bullrich dismisses this as an electoral stunt, while some economists say the move will have little impact because inflation is so rampant. The plan will also be funded by printing more pesos, thereby further stoking inflation.

Argentine dollar v US dollar

Chart showing Argentine peso against the US dollar
Black market exchange rate is roughly USD1 = ARS800. Trading View

At this stage, it is very difficult to say who will come out on top. Massa’s income-tax plan could yet be a vote winner, despite its shortcomings, though it will still depend on IMF support that could be difficult to obtain.

Equally, Milei’s dollarisation project is a worry both for economists and many voters, but political opposition and Argentina’s lack of foreign reserves make its chances of happening narrow at best.

It could well be that Bullrich prevails by capitalising both on voter nervousness about Milei and anger at the current government’s handling of the economy, despite slipping to third place in recent polls. But whoever wins, the biggest questions concern debt and the IMF.

Promising to service debt liabilities is one thing, but the state of the economy and growing poverty may quickly mean that the only feasible option is default. Having received the biggest IMF loan in history back in 2018, today’s crisis could well be about to morph into another.

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