The rheumatism of poverty, a debt with a strong cough, and an inflationary fever whose thermometer is skyrocketing. The symptoms do not lie: the Argentine economy is sick. Count 40% of the population in poverty and a debt contracted in 2018 with the IMF of 44 billion dollars, which the country is struggling to get over. But above all, inflation of 161% over one year in November (yes, yes), compared to 2.4% on average in Europe.
Faced with this seemingly incurable disease, Argentina has chosen a strange doctor: the new ultra-liberal president Javier Milei, inducted on Sunday. And in an attempt to heal his country, the head of state, who had promised not to hold back, actually applied a shock treatment. A devaluation of the peso, the national currency, of more than 50% this Wednesday. To the point that sensitive souls may ask themselves: is the cure worse than the disease?
A treatment that will devastate
“There is no alternative to a budgetary shock,” warned Javier Milei. Indeed, Anne-Sophie Alsif, chief economist at the Bureau of Economic Information and Forecasts (BIPE), makes no secret of it: it will sting. “This will inevitably put even more Argentinians in poverty and massively amplify the purchasing power crisis hitting the country,” she warns. Inflation is in fact not about to stop with such a devaluation. “Obviously, with a weaker currency, the price of imports increases, and therefore the cost of living,” notes Sylvain Bersinger, economist at Astérès. Before Wednesday, it took 400 Argentine pesos to pay for one dollar. As of this Thursday, 800 will be needed. The BIPE estimates that Argentina risks experiencing inflation of 113% in 2024, certainly a little less than the current rate, but frankly not encouraging.
Devaluing the currency so brutally is also very bad news in the context of the debt contracted with the IMF. Just like imports, all debts to be paid in dollars are doubled, “which adds other problems” continues Anne-Sophie Alsif. Finally, if devaluing the currency is a generally effective technique (we will return to this later), it loses its effects “when the country is in recession”, warns the chief economist. And that’s bad news, this is the fate that awaits the country, according to BIPE forecasts: after growth of more than 5% this year, the homeland of Lionel Messi should experience a recession of 3.5% in 2024.
The least worst treatment?
“It’s starting to do a lot,” recognizes Anne-Sophie Alsif. And indeed, here we are before a strange remedy which seems to amplify the problems rather than resolve them. So, why doctor, why? Just as Rome was not built in a day, Buenos Aires will heal slowly. “Yes, devaluation will initially amplify certain crises, but it would have been even worse without this action, particularly inflation,” supports the expert. The reason is quite simple: an overvalued currency, as was the case with the peso (and as is probably still the case, even with a 50% loss), is not sustainable in the long term.
Currency no longer corresponds to reality, no one wants it and buys with it, whether on the domestic market or with foreign partners, the central bank is forced to buy back its own money in dollars, which empties its reserves… The peso is probably worth three times less than what it was assessed until Wednesday, estimates the Astères cabinet. “I’m not saying that it’s the miracle cure that will cure all of Argentina’s problems,” says Sylvain Bersinger, “but it would have been worse if we didn’t act. No doubt it should even have been devalued much earlier. And probably also Javier Milei will belittle him again in the future. It’s not the miracle treatment, but the least worst treatment.” What we must see in this shock measure is therefore less an attempt to put Argentina back on its feet than to stop its bleeding.