During his first speech as president, on the steps of Congress, Javier Milei assured that “there is no alternative to adjustment and to shock” and recognized that “naturally this will have a negative impact on the level of activity, employment, real wages, and the number of poor and indigent people.” Despite this, he maintained that the new government cannot apply a gradualist plan because “there is no financing” and, he repeated, “there is no money.”
Pending the first official measures, Milei’s words are, for the moment, the only definitions on economic matters of the new Government. About, Ambit consulted with different economists about whether, indeed, “shock” is the only alternative when carrying out the adjustment. With different perspectives, everyone agreed on the need to seek fiscal balance, on the challenges of containing the escalation of inflation to avoid hyperinflation and the impossibility of accessing financing as a condition for applying a more plan.gradualist”.
little margin
“We believe that one of the main measures that the new Government should take, whether Massa or in this case Milei was elected, was to make a fiscal adjustment, aimed at the consolidation of public accounts. In the best of cases to a surplus, but at least to reach a fiscal balance given that there is no financing,” he said. Santiago Manoukian, Head of Research at Ecolatina, who explained: “The external credit markets are closed and the internal market is also stressed, forcing the Central Bank to intervene in the secondary market by issuing more and more pesos that no one wants to have in their pockets. And that generates an offer of pesos that continues to put pressure on inflationary dynamicsand that increases the risks of an even greater unanchoring of expectations and a greater fall in the demand for money that could further worsen the nominal crisis that we are going through.”
In that context, the economist said, “As the main measure to anchor expectations, fiscal adjustment along with monetary adjustment – turning off the Central Bank’s ‘little machine’ to assist the Treasury – were the main measures that we believed the Government should take at the beginning of its mandate.. Measures framed within a stabilization program.”
“This reduction in the fiscal deficit may have a bias more oriented toward reducing public spending or on the income side.: that is, some tax increase, some extraordinary tax (such as the tax on large fortunes) could also be proposed and that was also within the possibilities. Balance can be reached in different ways: the implementation can have different details,” said Manoukian, who also highlighted that the fiscal policy that the new government will implement will have a “pro-cyclical” bias, which will accentuate the economic cycle in the year ahead. comes”.
“In short, there is no room to be gradualist because there is no financing. If there were, as Macri had external financing, it could be. But in this case there is not and all roads lead there, if you want to avoid a worsening of the nominal crisis that we are experiencing,” he concluded.
“The possibility of a gradual path seems difficult”
“I think that due to the speed at which inflation has been increasing recently, added to the lack of financing, which according to Milei there is none, the possibility of a gradual path seems extremely difficult to me.. In that aspect I agree,” analyzed Juan Manuel Telechea, director of the Institute of Work and Economy (ITE) of the German Abdala Foundation.
On the other hand, regarding the shock, the economist pointed out that “You can discuss what it refers to and what gradualism we are talking about.””. “Because a 40% devaluation in the exchange rate is not the same as unifying it and having the devaluation exceed 150%. There we will know well what kind of shock we are talking about,” he summarized.
And he concluded: “As for the fiscal issue, it seems to me that it is clear, and it is precisely where there is the least margin, because since there is no financing, everything that takes to reduce the fiscal deficit is basically monetary emission that you have to use to cover that. So, in Milei’s logic, this emission would generate inflation and that is why – according to his vision – there is no room for anything other than a shock in the reduction of the fiscal deficit.
“We are in a hyperinflationary process”
Aldo Abram, executive director of the Freedom and Progress Foundation, assured that “The Government that left left Argentina in a hyperinflationary process”, due to the issuance and the “fall in demand for pesos” by people.
“We are in that process and it is difficult to stop. To stop it, you need drastic measures. The first thing is to stop financing the State with monetary emission, because if not we are going to effectively go to hyperinflation. And, the second thing, quickly regain the trust of the people, so that they stop the process of stopping demanding pesos. Let this process stop, or at least slow down,” the analyst highlighted.
“Stop financing the State means making an adjustment. Because there is no debt capacity of the State, because no one wants to lend to us. Not even the international organizations, because we failed to meet the goals of the agreement with the Fund that Sergio Massa made in August. So there is no money, effectively. Unless it is issued and we go to hyperinflation. That is why a tough adjustment must be made and in which the State must play its part. During the previous administration, the only sector that increased its purchasing power was the public sector. The rest lost purchasing power. Now, and this was the promise of the new Government, that the adjustment be distributed a little more equitably,” Abram stressed.
“Shock therapy”
For their part, when analyzing Milei’s speech last Sunday, EPyCA Consultores pointed out that when referring to the inheritance he received “he exaggerated and was inaccurate in the economic data”. “Its objective was to convey the need for the orthodox adjustment that it will implement in fiscal, monetary and exchange matters,” they highlighted.
Regarding the possibility of hyperinflation, the firm maintained that “the risk of prices accelerating and spiraling exists”. “The point is that economic policy has tools to contain them in a reasonable way. The pricing system suffers from distortions that must be corrected; but Their release could be coordinated by the State, in order to avoid the risk of this spiralization. If the decision is not to coordinate with the private sector, justifying it on ideology and leaving aside the necessary pragmatism, the combination of a terrible economic legacy and the bad practice of the new government could effectively lead to the hyperinflation that Milei mentioned,” they added.
Finally, from EPyCA they maintained that in his speech, Milei insisted that “shock therapy” is the only way to avoid this hyperinflation, “particularly with a drastic fiscal consolidation of the order of 5% of GDP.” “That is the approximate amount of the financial deficit of the National Treasury. Reducing it from one year to the next implies not only cutting expenses (public works, transfers to provinces, energy and transportation subsidies) but also letting the inflationary acceleration impact other items. (retirements, social plans, state operating expenses in general)”, they concluded.
Source: Ambito
