Elections in Argentina: understand the economic challenges that the new president will need to face

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With exorbitant inflation, uncontrolled exchange rates and a series of fiscal deficits, experts say that the elected head of state will need to be pragmatic to implement structural reforms in the country. Elections in Argentina: find out who the three candidates are likely to be elected The first round of presidential elections in Argentina takes place this Sunday (22) – and could chart new directions for the decade-old economic crisis that the country is facing. The reading of experts heard by g1 is that the country’s new head of state — whoever it may be — will have a series of challenges to face ahead. A short list of the main aspects of the economic crisis that the country is facing are: exorbitant inflation, which already exceeds 130%; the strong exchange rate devaluation of the Argentine peso; the continuous issuance of money by the local Central Bank to sustain the hole in public accounts; a billion-dollar external debt, along with a lack of international reserves; the high levels of poverty rate in the Argentine population. And that’s not all. Part of the new president’s challenge will also be to form relevant political capital to deal with the lack of national consensus on the inflationary and interest rate situation in the country, and to be able to implement the necessary structural reforms. Before delving into Argentina’s economic issue, see below who the main presidential candidates are The candidates The three main candidates for the presidency of Argentina, who have more than 80% of voting intentions, according to the results of the country’s primary elections : The ultra-liberal and far-right economist Javier Milei From the “Liberty Advances” ticket, the economist declares himself “anarcho-capitalist”. His promises include the dollarization of the economy (replacing the Argentine peso with the US dollar) and the extinction of the local Central Bank, for example. Who is Javier Milei, the far-right candidate who won the primaries in Argentina The current Argentine economy minister, Sérgio Massa Lawyer and politician, the Argentine is a member of the “Union for the Fatherland” and the candidate chosen to represent the Peronist government, the main force Argentine politics for decades. His promises revolve around combating inflation and the international business potential that the country has, based on oil, gas and lithium. The center-right candidate, Patrícia Bullrich Former minister of security, labor and social security in Argentina, Bullrich is one of the leaders of the “Together for Change” coalition. Her proposals include establishing a new exchange rate regime, cutting spending to combat inflation and reducing taxes on agricultural exports. The new president’s economic challenges With exorbitant inflation, high levels of poverty, lack of reserves and a strong exchange rate devaluation — which leads the country to have more than ten current exchange rates —, the new head of state will have a long list of lessons From home. For analysts interviewed by the report, a more practical stance, focused on efficiency, and that avoids very radical positions would be desirable to promote the changes that the country needs. “After being elected, [o novo presidente] necessarily needs to become a pragmatic being. When you sit in the chair of the presidency, it is very difficult to take extreme directions”, says the economist from the São Paulo School of Economics at Fundação Getulio Vargas (EESP-FGV), Paulo Gala. Furthermore, experts reinforce that the new president will need to face an inefficient State and have very clear economic plans. This is the case of implementing fiscal and monetary reforms in the country. Fiscal reform According to experts, an important part of what explains the current situation in Argentina is the accumulation of fiscal deficits. For more than 10 years, government spending has been greater than how much it can collect. In addition to essential expenses, which cannot be cut because they guarantee the functioning of the State, the government also granted a series of social aids and subsidies that reduce, year after year, public revenue. Without money to finance its recurring expenses, the government started issuing debt through public bonds. Even so, the resources were not enough. The State that spends a lot is unable to close its accounts and, therefore, starts printing money. This increases inflation and generates a series of micro and macroeconomic problems. Furthermore, the greater volume of pesos on the streets also generated a strong devaluation of the local currency and encouraged the creation of a series of alternative exchange rate regimes. (understand more below) According to Roberto Uebel, professor of international relations at the Escola Superior de Propaganda e Marketing (ESPM), this scenario also worsened a problem that had already been seen for years in Argentina: the strong dependence on the US dollar. “Political and economic choices made over the last 30 years have made the country’s economy completely dependent on the dollar, whether for simple transactions, such as buying a newspaper on the corner, or large Argentine transactions, such as exports,” he states. “This has led to the existence of several exchange rates, which also end up undermining the purchasing power of the population and helping to make inflation uncontrolled”, adds Uebel. In August, the International Monetary Fund (IMF) signed an agreement with the Argentine government, releasing US$7.5 billion to the country through an assistance program. This was the sixth review of the agreement between the parties — Argentina had already signed a credit program with the fund last year, worth US$44.5 billion, having committed to increasing its international reserves and reducing its fiscal deficit. A new review of the agreement is scheduled for after the presidential elections. Monetary reform Among the consequences of the fiscal deficit, the need for monetary reform in the country became evident. In the first fortnight of the month, Argentina’s National Statistics Institute reported that inflation in the country rose 12.7% in September. In the 12-month window, the indicator reached 138.3%. In response, the Central Bank of the Argentine Republic (BCRA) again raised the country’s basic interest rate by 15 percentage points (pp) — from 118% to 133% per year. And, according to experts, the cycle of rising interest rates is just beginning. “Any monetary reform plan will imply a higher interest rate to try to stabilize prices. If the goal is to control inflation, and this has been the number one priority of Argentines, the movement to increase interest rates will be necessary”, says Gala. It is worth remembering that Javier Milei, the winning candidate in the primary elections in Argentina, has as one of his promises the dollarization of the economy. The measure would replace the Argentine peso with the US dollar — and, as a result, the country would not only need the United States Mint to import the currency, but would also leave monetary policy decisions dependent on the Federal Reserve (Fed, the US central bank). Will dollarizing Argentina’s economy solve the country’s economic crisis? Balance of payments crisis Another point is the balance of payments crisis. The term in “economese” means that more money leaves than enters Argentina. Part of its origin is also in the external debts that the country has contracted over the decades, but mainly in Argentina’s inability to attract foreign capital. As if that were not enough, Argentina is going through a moment of historic drought in 2023. The lack of rain affected the last harvest of corn, soybeans and wheat, in addition to dropping the country’s production and killing thousands of heads of cattle. Attempts to manipulate the exchange rate were generating problems for foreign trade and inflation. It has an internal impact — with impoverishment of the population, complication in investment decision-making and reduced productivity — and external, which has reverberated in export capacity. Currently, there are more than ten dollar exchange rates in force in the country. This is because there was an increase in the use of the North American currency by the population, amid the loss of credibility of the Argentine peso. Without sufficient reserves to meet demand, the government imposed a purchase limit per person, creating parallel trade. Unofficial means of buying and selling dollars have their own quotations, which escape supervision. In this context, the country’s main parallel exchange rate emerged, the “blue dollar”, which operates at almost triple the value of the official Argentine exchange rate. “The president-elect will need to address the root causes of Argentina’s economic problems […] which is excessive dependence on the dollar. There is no magic formula and the outlook is worrying. It is necessary to outline measures to restore investor security and attract capital”, says Uebel. As for Gala, from FGV, it is necessary to remember that the situation the country is going through is serious – and its solution will take time. “It’s a horizon of at least two years, it’s not something that can be resolved in a matter of months. Argentina needs drastic economic reform, and unfortunately this does not seem to be a short-term perspective”, he adds.

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