What Milei’s victory in Argentina means for the Brazilian economy

A cause for concern for the government of Luiz Inácio Lula da Silva (PT), the election of libertarian Javier Milei in Argentina’s presidential elections could have positive or negative economic effects for Brazil, depending on the conduct of his agenda. The dollarization of the Argentine economy, one of his campaign promises, is a risky measure, but it could help resolve the country’s situation, if it is handled well, according to some analysts.

On the other hand, the country’s exit from Mercosur, as the president-elect has already suggested, would harm negotiations for an agreement between the bloc and the European Union, which could directly affect trade between the economies involved, including Brazil.

Since 1991, Brazil has been the main destination for products that Argentina exports, according to the National Institute of Statistics and Censuses (Indec), an Argentine government body subordinate to the Ministry of Economy.

From the perspective of Brazilian foreign trade, Argentina was the third main destination for exports in 2022, with over US$15.3 billion in transactions, behind only China (US$89.4 billion) and the United States (US$37. 4 billion), according to data from the Ministry of Development, Industry, Commerce and Services.

The South American neighbor was also the third country from which Brazil imported the most last year, with US$ 13.1 billion in operations of this type, also after China (US$ 60.7 billion) and the United States (US $51.3 billion).

But Milei assumes the presidency of the country in the midst of a challenging scenario, to say the least. The country faces inflation of 143% in the last 12 months and a poverty level above 40%, while the peso has already depreciated by more than 50% against the dollar in the last year, and public debt reaches 85% of the Gross Domestic Product (GDP), with an upward trend.

Responsible for the majority of Argentine exports, agribusiness suffered one of the worst droughts in the country’s history in the 2022/2023 harvest, which drastically reduced production and consequently the flow of money into the economy.

In the first ten months of 2023 alone, Argentina had to import the equivalent of US$1.9 billion in soybeans from Brazil, surpassing in value what it acquired from its neighbor in automobiles, the main Brazilian product exported to the country historically. To give you an idea, in 2021, all Brazilian soybean transactions for the Argentine economy had totaled US$90 million.

The recovery of agricultural production in this second half of the year, combined with the production of shale oil and gas in the Vaca Muerta field and the exploration of lithium, the main mineral used in electric car batteries, should help boost economic activity in Argentina under Milei, which could also boost trade with Brazil.

“For Argentina itself, [a eleição de Milei] It is an opportunity to change the current economic line, a model Peronist has implemented for decades”, says Silvio Campos Neto, chief economist at Tendências Consultoria.

The idea of ​​dollarizing the Argentine economy, if it comes to fruition, could have positive effects for Brazil if carried out successfully, according to some analysts. The measure, however, is complex and could not be implemented in the short term, since Argentina does not have sufficient foreign exchange reserves in dollars.

“Milei came with a different speech, a liberal economic proposal and commercial and financial opening, privatizations. His politics will be tested. The dollarization he proposed also happened in Ecuador and it worked,” said partner and chief economist at JF Trust, Eduardo Velho, to Agência Estado. “If it is successful with the objective of recovering confidence, with the monetary shock and the recovery of credibility, the person who will benefit from this will be Brazil itself”, he added.

“I understand his reading as meaning that the peso has no credibility among the population itself, that it is a toxic currency. A shock of credibility is needed, but I don’t think he can move forward with this idea”, says Campos Neto. “Because Argentina is a very large, very complex economy and has a shortage of dollars,” he explains.

For Hugo Carcanholo, professor at the Department of Economics at the Federal University of Paraná (UFPR), the Argentine economic scenario makes implementing the measure difficult. “In hyperinflated economies, this [dolarização] happens naturally. The logic of the Real Plan followed this path somewhat,” he says. “The point is that for Milei to do this, he has to have dollars, but he doesn’t.”

Argentina’s eventual exit from Mercosur would compromise an agreement with the European Union

Another promise from Milei, however, worries the Brazilian government: Argentina’s withdrawal from Mercosur, an economic bloc created in 1991 and which includes, in addition to the two countries, Uruguay and Paraguay. “Mercosur is a poor quality customs union, which creates trade distortions and harms its members,” Milei said during the campaign in an interview with Bloomberg.

The eventual dismantling of the group would still compromise an agreement with the European Union, which has been stuck since 2019 awaiting a consensus between the countries involved.

“It would be an additional difficulty for the agreement that Mercosur is trying to reach with the European Union, which, in any case, already faces a series of obstacles”, says Campos Neto, from Tendências Consultoria.

Still campaigning, the then candidate even suggested that he would break trade relations with Brazil. “Not only will I not do business with China, I will not do business with any communist. I am a defender of freedom, peace and democracy. Communists do not fit into this. Not the Chinese, not Putin, not Lula,” he said, in an interview with American journalist Tucker Carlson.

Once elected, he stated that his first international trips will be to the United States and Israel, breaking the tradition of visiting Brazil first.

Some of the promises should not come true

But experts consider that all statements made during the campaign cannot be taken literally, since the libertarian, in the presidency, will have to adopt a more pragmatic and less ideological stance. “It is natural that there will be a moderation of tone from now on”, says Campos Neto.

“One thing is campaign speech, another thing is pragmatism. If, on the one hand, Argentina is important for Brazil, Brazil is also important for Argentina. I think it is very difficult for him to break with Brazil for purely ideological reasons. If he is responsible, he won’t do it”, says Carcanholo.

Members of the Lula government have already declared, privately, that the economist’s victory brings more uncertainty to the regional scenario and to the advancement of trade agreements, notably the one negotiated between Mercosur and the European Union.

In recent weeks, however, members of Milei’s campaign sent messages to the Brazilian embassy in Argentina to calm tensions and say that the relationship with Brazil is very important, according to the newspaper “Folha de S.Paulo”.

For Carcanholo, the libertarian’s promise to abolish the central bank should not be carried out either. “First for political reasons, because he doesn’t have a majority in Congress. And another, because it is unfeasible. Economic theory does not show how abolishing an independent central bank can be good for the economy. What the literature shows is the opposite: that you need an independent central bank. Those who say this are Nobel Prize winners in Economics, it’s the Chicago School.”

Eirini Tsekeridou, an analyst at the Swiss bank Julius Baer, ​​points out that in his speech after the election results, Milei reiterated his commitment to a reform agenda, mainly spending cuts, but did not mention the dollarization of the economy or the extinction of the Argentine central bank. .

“A great challenge [de Milei] it will be governability, and we hope that he moderates his rhetoric so that he can negotiate with the other parties in Congress and advance his agenda”, says the analyst.