GTBT - The miracle of Milei in Argentina?

: Hubert Walas; Created: 27 March 2025

A year of shock reforms: success or prelude to more difficult challenges?

Charts like this one or that one. They speak for themselves. They are the ones that give the best laurel to the first year of the rule of Argentina's eccentric President Javier Milei.

However, his critics will show a graph like this one or this one. Where, then, does the truth lie? Has the "Milei experiment" already succeeded?

Last December 10 marked one year since Javier Milei took the helm in Argentina, which was plagued by constant economic chaos, in a bid to restore its former luster. Milei took over a country burdened by heavy debt, high levels of social spending and a massive inflation rate of more than 200% (year-on-year).

True, it hit almost 300% in the following months, but after 12 months the December reading showed a reduction to 117% - falling three times in a few months. What's more, since Milei took over the leadership of the South American state, almost as if by magic, the budget, which had previously been chronically in deficit, began to record very large surpluses.

However, there was little magic in this action, but instead a thoughtful, albeit controversial, economic strategy. Its symbol became a chainsaw, with which the Argentine was to cut down all the "parasites of the state," against which (as he himself mentioned in an interview with The Economist) he has "nothing but contempt."

When the saw went off, almost overnight, Milei slashed government spending by nearly 30% by, among other things, removing half of government ministries and laying off more than 30,000 government employees, cutting energy and transportation subsidies, suspending infrastructure projects, and freezing public sector salaries.

On January 14, INDEC, the country's statistics bureau, reported that prices rose by just 2.7% month-on-month in December, down from 25.5% a year earlier.

If it's so good, why is it so bad, opponents of Milei ask? More than half of Argentines live in poverty, meanwhile, even though inflation is falling, it is still relatively high - so prices continue to rise at a painful pace, with wages low in real terms. The lack of government support has made life even more difficult for millions of citizens.

Let's take a look at where the Milei ship is drifting to? Is it sailing into calm waters after rough waves? Or is it only now starting to get really difficult?

Diagnosis

Inflation, high and inefficient public spending, political capture, corruption -- these were Argentina's main economic problems after Milei took office, and according to former Argentine Central Bank Governor Guido Sandleris, the new president diagnosed them well.

The country was on the verge of hyperinflation, the central bank had negative net foreign exchange reserves, the budget deficit was out of control, and utility fees and prices were long out of date, frozen at previous levels by the previous administration. On top of that, Milei was entering the job with a very fiery toolbox, for his party is in the minority in Argentina's congress.

Today, after more than 13 months in operation, Milei calls his government the best ever, and more and more people are taking the view that Milei's experiment has indeed worked.

Therapy

If a patient is diagnosed with a number of diseases, the doctor should be held accountable for the effectiveness of their treatment. For Milei, the most serious condition that required immediate attention was inflation.

Inflation in Argentina had been rising, with slight fluctuations, for more than 10 years, but a particularly high rate of increase began the year before the 'anarcho-capitalist' president took office. At that time, an increase was evident, from an already high 50% year-on-year, to nearly 300%, in April 2024. Thus, the inflationary peak had already occurred during Milei's term, nevertheless, since then, the annualized reading has managed to fall three times to 117% in December. Month to month, the inflation parameter fell from 25% when he took office, to below 3%, starting in October 2024.

How did he do it? Milei's key legislative victory was his controversial "omnibus" bill. It originally aimed to cut government spending, privatize public enterprises (regardless of whether they were profitable) and introduce a zero deficit policy. Although the original bill was somewhat watered down, despite the weaknesses in Congress, Milei's party managed to push through a bill that defined the direction of change.

Beginning in July 2024, Milei drastically reduced the Central Bank's money issuance, effectively halting inflationary pressures. In addition, the Central Bank's reserves have been rebuilt, and the unsustainable public debt on the balance sheet has been reduced.

The indicators of improvement are many. According to Reuters, Argentina was expected to post its largest trade surplus ever this year, between $18-19 billion. Milei promises to make Argentina a net energy exporter by tapping into the vast shale reserves in the Patagonian region of Vaca Muerta. Grain exports have also increased, helped by some easing of currency controls and better weather. Meanwhile, massive spending cuts resulted in Argentina's budget posting a surplus for the first time in 14 years.

JP Morgan's published "country risk index" has also improved dramatically since Milei took the helm of state. The benchmark shows the spread of Argentine government bond yields over comparable U.S. debt. Risks fell from over 2,100 points to 561 in January 2025.

Improved investor sentiment is manifested in, among other things, new planned energy investments. British-Australian conglomerate Rio Tinto is to invest $2.5 billion in the Rincon lithium mining project. And a consortium of Argentine companies, as well as local offshoots of Chevron and Shell, are to invest $3 billion in a new pipeline.

The decelerating inflationary trend is expected to continue. The year-on-year reading, according to the banks, should fall to 30% in 2025, which would be the best performance since 2017. The Milei government has even more ambitious plans, targeting a value of 18%, a value not seen in Argentina for nearly 10 years.

All of this is affecting Argentina's economic growth forecasts. Although the country's economy ultimately contracted by about 3.6% in 2024, almost all institutions believe that Buenos Aires will more than make up for the loss in 2025. According to the OECD, Argentina's economy will grow by 4% in 2025, the IMF and the World Bank put the figure at 5%, while JP Morgan estimated it as high as 8.5%.

"The recession is over, from now on there is only growth [...] From now on it's all good news," Milei said in November. The Financial Times writes directly of the country's emergence from recession.

Long-term illness

If it's so good, why is it so bad, some might ask? Milei is not free from criticism, and the lion's share of his opponents' criticism boils down to one theme - poverty.

Milei's reforms have hit not only the debauched state administration or infrastructural projects, but also - and perhaps most importantly - the low strata of society that relied on social programs for their daily existence.

Brutal austerity programs of so-called austerity have deepened the recession in Argentina, where consumer spending has fallen by 20% over the past year. The rising cost of food and basic products has led to a situation where some 53% of Argentines now live in poverty - the highest level in 30 years. An additional 5.5 million Argentines have fallen into poverty in Milei's first six months in office. As Reuters reports, 7 in 10 children now live in poverty.

Homelessness, hunger, or eating disorders have become more common. "We are seeing cases of scurvy, cases of eye injuries due to vitamin A deficiency, with corneal injuries," Norma Piazza, a pediatrician specializing in nutrition, told Reuters. "These things have existed in Central America, Africa, Asia, but we have never seen patients here who have had eye injuries due to vitamin A deficiency," she said. One of the causes of poverty is the controlled devaluation of the local currency, the Argentine peso, whose exchange rate against the US dollar has risen from 700 to more than 1,000 pesos per $1.

Moreover, academics and students are also protesting in response to the blockade of university budget increases. Up to 250,000 people were expected to take to the streets.

The general trend of deindustrialization is also worrying. Critics reproach Milei for Argentina's economy's over-reliance on agriculture and mining, while industry lies dormant. The entire year of Milei's presidency has been a major crisis for the industrial sector. Mid-year readings were as low as -20%.

However, Milei has arguments in his defense. Regarding poverty - this one was at a high level already. A year earlier it was 43%. Moreover, a large proportion of citizens were unhealthily dependent on state aid as their only source of livelihood. A large number of people engaged in fraud, or even deception to defraud the state aid.

Only six million Argentines, out of some 30 million of working age, officially work in the private sector. Their taxes fund not only the four million public employees, but also the 21 million Argentines who are fully or partially supported by subsidies. Eight of the 21 million are pensioners, but only half of them have contributed anything to the pension system. The rest of the population (nearly 47 million) are children or in the black economy.

Earlier this year, the government launched a hotline to report benefit fraud. In Argentina, benefits and meal subsidies are paid through social organizations, often controlled by Peronist politicians or labor unions. Corruption is widespread. Thanks to new control measures, the government has halted payments to more than 1,000 aid centers and eateries that were found to be bogus. It is estimated that nearly 50% of some 45,000 such facilities do not exist.

The government has also launched a review of disability pensions. In 20 years, the number of disability pensioners has grown from 80,000 to more than 1.2 million. In the first audit, only 7% of 2,559 cases were entitled to benefits. The same broken arm annuity was used in 157 cases. The government estimates that better auditing will save up to 40% of the cost of annuities for people who did not pay premiums.

The devaluation of the peso, which negatively affected citizens' purchasing power, was a correction that brought the currency closer to its real market value. This means that illegal trading of the dollar has become less profitable, and people are more willing to hold their money in legal ways. This was helped by the so-called new tax amnesty aimed at Argentines who kept dollars "in the sock" or in foreign accounts. Thanks to incentives to disclose these savings, some $19 billion flowed into the banking system, boosting the country's foreign exchange reserves and strengthening the peso.

Above all, Milei, before coming to power, announced that reforms would "hurt." This, too, sets him apart from the large wave of populist leaders from whom we usually hear cheap prescriptions and the promise of immediate improvements when they come to power. Milei immediately pointed out that "first we will have to go through hell." So, when hell actually came, no one was surprised, because he trusts that these inconveniences are necessary to make things better later.

On the other hand, it's hard to blame him for the problems created by previous mismanaged governments. And people are noticing. Most Argentines believe that the country is further down the road in a dire economic situation, but they trust Milei to lead Argentina out of a years-long crisis.

Perhaps that, rather than inflation rates or GDP, is the best measure of his success. Despite the toil and drift, support ratings for Milei are very high, oscillating around 50%. The percentage of people with an optimistic view of the economy's trajectory rose from 41% to 49% in December 2024, compared to September. According to a Gallup poll, the number of people reporting an increase in living standards and a general feeling about the state of the economy is growing.

Will it only get tougher?

That's a positive conclusion for Milei, but it doesn't mean things will be easier now. Counterintuitively, it is now that the stairs may begin, as the shock therapy will have to evolve into more complex solutions facing further challenges.

Such a challenge will be the debt service and penalties that Argentina must pay. For example, in 2012, Argentine authorities expropriated the energy company YPF. The result? Last year, a court in New York sentenced the country to pay $16 billion to its former Spanish owners! Argentina has appealed and claims the amount is grossly excessive. A similar case involves Aerolineas Argentinas. In total, the total fines and interest that Buenos Aires will have to repay could be as much as an astronomical $31 billion.

Additionally, Argentina took a $44 billion loan from the IMF in 2022, which it has not yet begun to repay. And it will start doing so starting next year. Economic weakness and the aforementioned problems mean that Buenos Aires may have a liquidity problem. With this in mind, Milei plans to get another aid tranche from the IMF, this time in the amount of $10 billion, in order to survive the difficult period of revival.

Normally, the IMF would be rather reluctant to lend money when the country has not yet begun repaying the first loan, but two facts speak in Milei's favor.

First, the IMF is satisfied with the reforms so far. And second, the IMF is mainly controlled by Americans. Meanwhile, Milei remains in an almost "chummy relationship" with the new administration that has taken the helm of the Americas. The Argentine was the first foreign leader to be received at Mar-a Lago by Donald Trump after his victory. Elon Musk often cites Milei's reforms when announcing his groundbreaking DOGE department. Vivek Ramaswamy or JD Vance do the same. The Argentine has also been a guest on the new administration's media barons' podcasts: Tucker Carlson, or Lex Friedman.

In addition to his economic agenda, Milei supports the American right in the cultural struggle against leftist ideology, especially on the global stage. He has made 17 trips abroad - almost half to the US, one to Israel and four involving meetings with Musk - and has given dozens of conference speeches on the dangers of the "woke virus."

Javier Milei's close ties to this group of people is inevitably his great political resource, which helps arrange many things including IMF aid. The question is whether this will also translate into the willingness of U.S. investors to invest in the South American country. If that actually happened, Milei would then claim the "full pot."

New U.S. Secretary of State Marco Rubio said at one time that the U.S. should use its influence in the IMF to help restructure Argentina's debt, which he said would "give Milei the space to implement much-needed reforms."

The Argentine is also proving to be a pragmatist with regard to the main adversary of the US, i.e. China. Previously, Milei was extremely aggressive toward, as he called it, "communist China." Today, in the face of liquidity problems, this rhetoric has visibly smoothed out. In June, China renewed a currency swap with Argentina, saving the country from a sudden loss of much-needed foreign exchange reserves. Then Chinese leader Xi Jinping and Milei met for the first time at the G20 summit in November.

Keep the implosion of change

So what's next for Milei? The infighting is not over yet. Recall that December's 117% reading, although 3 times lower than in April, means that prices have doubled year-on-year. This will continue to be one of the main goals of the incumbent Buenos Aires administration.

Experts also point out that the Milei government should slowly loosen its grip on the peso. The Central Bank recently announced a slowdown in the devaluation rate, the so-called "creeping exchange rate," from 2% to 1% per month. But the peso, despite the devaluation, relative to the market is still too strong, hurting investors. Why has the peso strengthened in real terms despite the sharp nominal devaluation? Because of inflation. Despite the devaluation, when adjusted for inflation (in real terms), the peso appreciated in real terms. This "real appreciation" makes Argentine goods and services more expensive relative to their trading partners, hurting exports and making imports more attractive.

In addition, Argentina has all along had a system of currency controls known as "cepo," in which citizens have limits on the purchase of foreign currencies and high taxes are imposed on foreign currency transactions. The idea is to limit the outflow of capital from the country, but the regulations negatively affect the amount of foreign investment and overall investor sentiment.

According to Kezia McKeague, director at strategy firm McLarty Associates, the removal of controls is "an absolutely necessary condition to see a real increase in foreign investment." This is, according to many experts, the most important reform that awaits Argentina.

Milei, however, believes it will not release the peso until it has a large injection of hard currency at the central bank to calm the markets and guard against a run on the bank. This is where the aforementioned IMF loan is important. Milei found a nearly empty treasury and is now struggling to rebuild it.

Strong start

So, can it be said today that the "Milei experiment has succeeded"? I think it is still too early for that. Certainly, the first year of his rule was successful and brought positive symptoms for the Argentine economy. However, the next years of rule do not at all promise a "walk" for the Argentine leader.

While the public's confidence in Milei's "see-saw" policy endures, it is not a given forever. Ordinary citizens have patience with Milei, but they bear the brunt of the reforms. That's why Milei in 2025 must start delivering results that will make life easier for residents. Poverty rates, economic activity, cost of living - these will interest the average Argentine the most.

Milei further needs the "street" to continue his reform program. For as early as the end of 2025, Argentina will hold congressional midterm elections. There, Milei's party La Libertad Avanza has a minority and with a good result has a chance to expand its presence. This could strengthen Milei's mandate and give it more tools to effect change. However, if public perception of Milei collapses, it could give the leftist opposition a chance to return to power. This one, however, is divided and weak today. The very fact that Milei, with a weak mandate in Congress, has been able to push through many key changes, deserves recognition.

The second of Milei's challenges, and one that is rather beyond the 2025 horizon, is the question of how an Argentine will be able to steer the country's development once the need for only harsh and necessary cuts ends. Milei stands in contempt of the concept of "state influence on the economy," while today this trend in the world is in reverse.

The press likes to compare Milei to Trump or Orban, but on economic grounds he is very different from them. As the authors write in The Economist, while Trump is fond of policies of protectionism, tariffs, and state support for industry, Milei is a radical advocate of the free market, free trade, or fiscal discipline.

"A true believer in open markets and individual freedom, he has a quasi-religious zeal for economic freedom, a hatred of socialism and 'infinite' contempt for the state. Instead of industrial policy and tariffs, he promotes trade with private companies that do not interfere in Argentina's internal affairs, including those from China. He is a small-state Republican who admires Margaret Thatcher - a messianic example of an endangered species," writes The Economist appreciatively.

In this context, it is closer to Germany's economic policy than to the US. However, today Berlin is being criticized for its "excessive austerity", as some economists consider Germany's fiscal restraint as one of the stones that hangs around the neck of European industry, impeding its development. Of course, Argentina's situation is far worse, but this shows that austerity policies also have their limits. The question is whether Milei-as announced-will reduce the state's influence to almost zero, or whether he will, however, break out of his promises.

Therefore, most likely, only when we know the full range of Javier Milei's instrumentation and his approach to the many various challenges that await the country, and their results, will we be able to say with certainty whether the "Milei experiment" has succeeded. Its start is certainly very promising, and this must be emphasized.

Sources:

Hubert Walas

Founder of Good Times Bad Times, author.

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