Will Javier Milei’s model run out of gas once the economy starts?

For some economists The plan does not differ much from other stabilization programs that have been carried out before in Argentina and other countries, based on exchange rate lag which forces compensation with “reforms.” Others consider that at some point the model is unsustainable and a devaluation occurs.

One of the cases could be convertibility, which generated confidenceeliminated inflation, generated income from financial dollars and thus, with a low exchange rate, managed to generate growth until The margin of competitiveness was exhausted.

The debate that remains ahead, and that some economists are already raising, is if the model can run “out of gas” when the economy starts and demand an increase in imports. Will the dollars be there to pay them or will a new cycle of debt come?

Argentina does not have the same competitiveness as the United States

In the background of this discussion there persists, so to speak, the criticism of dollarization that at least in terms of speeches, President Javier Milei has not finished abandoning. The proposition is that Argentine productivity is not as high as that of the United States, so that the end result is lower product prices. Except in food, Argentina is not competitive in the rest.

In the Argentine Industrial Union (UIA), Warned of this, they point out that the factories produce efficient “indoors”, but behind closed doors taxes, financial costs and logistics make them lose margin to export.

Industrialists no longer demand so much protection

Hence the local industrialists are now modifying their traditional protectionist discourse. They are trying to make Argentina a “friendshoring” platform of value chains to supply companies in the United States and Europe. And for this andThey are demanding competitiveness.

Recently, at the meeting organized by the Latin American Steel Association (ALACERO) in Buenos Aires, the head of the Techint group, Paolo Rocca came out in support of the deregulation policies of Javier Milei’s government, as well as the tax reductions. However, he spoke about competitiveness. He clarified that “the exchange rate should reflect trade flows and not short-term capital flows.”something that is happening now with the carry trade.

Classic exchange rate adjustment models

In this regard, Economist Emiliano Libman points out that “although I was not so clear at the beginning, evaluating almost a year of management, I would dare to describe the current scheme as a stabilization program ‘based on the exchange rate’.”

“There is a ‘classic’ dynamic in which the exchange rate increases less than prices and interest rates fall (due to the effect of the lower expectation of devaluation). There is then produced a “cocktail that combines a real exchange rate and lower real interest rates, credit expansion and a recovery or even expansion of activity,” describes the CONICET research economist.

But Libman warns that “At some point, the process runs out of gasoline, because the current account deficit usually increases.” “This is due to the combination of a greater the total external debt, its corresponding interest burden and the higher trade deficit, explains. Behind this comes a devaluation and restart of the cycle.

Eugenio Marí, Chief Economist of the Libertad y Progreso Foundation, has a less pessimistic outlook, while rejects the hypothesis of professionals who are framed in the structuralist schoolwho consider that the lack of dollars in countries like Argentina is due to the fact that the exportable supply based on raw materials or manufactures of industrial origin is never able to generate the dollars necessary to pay for the increase in imports.

Marí considers that “The Caputo model does not necessarily have to run out of gas, “unless we keep prices regulated in a way that is inconsistent with all other variables.” He recognizes that there may be an “external constraint” as the structuralists point out, but “It only exists if you want to set an inconsistent exchange rate price.”

Marí affirms that the Argentine economy can function with an appreciated exchange rate “But that is sustainable with an improvement in average productivity.” That is why he points out that economic reforms that allow this objective to be achieved without having to affect the price of the dollar “must be done urgently.”

Brazil speeds up its devaluation

Countries are usually quite practical. Given the recent Donald Trump’s victory in the United States elections and anticipating that hand in hand From the Republican side, a devaluation of the dollar is going to come to discourage imports, governments like Brazil’s have already begun to devalue their own currencies.

Andrés Reschini, from the consulting firm F2 Soluciones Financieras, He thinks that the main anchor that Caputo’s model has is the fiscal one, not the exchange rate, and in that sense he believes it can work. “I believe that the main anchor is the fiscal one, beyond the exchange rate anchor that is used for prices,” he explained. Reschini points out that “It is true that the industry probably demands a greater volume of imports, but it seems to me that for that reason the plan also aims for exports to grow strongly, especially those linked to energy.”

The independent consultant Ivan Carrino, meanwhile, rejects the idea that the dollar is currently “late.” “Between December 2017 and October 2020, prices in dollars fell 70% in Argentina (measured to the parallel dollar). Today they are still 18.6% below December 2017,” he states.

The weak point of the model is the external sector

Meanwhile, the consultant GMA Capital maintains that so far it has worked well, allowing the government to pay maturities in dollars. without having to negotiate an agreement with the International Monetary Fund (IMF) but warns about the weak point of the model.

“The truth is that the current model would find relief in the face of a significant inflow of foreign currency. The weakest link in the chain is the external one: The exchange current account deficit amounted to US$3,860 million in the last 4 months, Treasury maturities in foreign currency total US$11,700 million in 2025 between public securities and the IMF, and net reserves are negative by US$5 .581 million (IMF methodology)”, he points out in his latest report. GMA Capital adds that “To make matters worse, although the lifting of controls would be on the horizon, there is no certain date.”