Milei’s success in Argentina not threatened by $7 Big Mac

(Bloomberg Opinion) — Order a Big Mac in Buenos Aires and you’ll pay about $7 — one of the priciest tags for the popular burger in the world(1).

This was the result of Javier Millay’s “shock therapy” program, which led to a sharp slowdown in inflation and a rapid appreciation of the real exchange rate (i.e., adjusted for price increases) during his first year as Argentina’s president. Fiscal adjustments, a creeping currency and tight monetary policy have limited peso printing, with monthly inflation falling to 2.4% in November from 25.5% in December 2023, when Milai took office. excellence.

Yet the resulting strength in the peso worries some economists. For much of the past century, Argentina’s history has been a cycle of inevitable booms followed by busts: years in which the peso appreciated on capital inflows, which would be replaced by a loss of competitiveness, manufacturing layoffs and a widening current account deficit. Once investors lose confidence in the country’s ability to finance these imbalances, capital flows reverse, triggering sharp currency depreciations, rising inflation, and political instability—and it’s game over for any government. Some fear that Argentina under Milai will repeat the same mistakes. : “The peso is overvalued anyway and needs to fall,” Robin Brooks of the Brookings Institution, who has been arguing for months that Argentina needs to devalue its currency, posted on X last week. “There may be a new government, but it makes the same mistakes as all past governments. It will end in tears,” he also wrote in June.

It is true that things are much more expensive in Argentina: although I left twenty years ago, I have always visited the city of my birth regularly; this time, I can’t think of a time when it was more costly when converted to US dollars. I probably spend twice as much as I did a year ago. Brazilian beaches and Chilean shopping malls are ready to welcome hordes of Argentines this holiday season. The situation was made even worse with the Brazilian real plunging 22% in 2024 (what a reversal of fortune!) as Argentina’s main trading partner brews a fiscal crisis.

But nonetheless, it would be a mistake to think that these are clear signs of economic difficulties ahead.

First, because any successful stabilization program will inevitably lead to exchange rate appreciation. The weird thing isn’t that some items in Argentina are now priced like they are in Mexico or even the United States (clothes and technology here are ridiculously expensive); what’s really weird is that until recently, at the Four Seasons restaurant in Buenos Aires, you just had to pay For $25, you can enjoy a delicious steak and wine with your lunch. For international tourists, those glory days are gone and the gap between the parallel rate and the official rate (which was almost 200% after Milais was elected) is now around 10%. And much of this was achieved without the previously planned inflow of hot money.

Secondly, foreign exchange is only one item in a company’s cost structure. As Fernando Marengo, chief economist at BlackTORO Global Investments, points out, the competitiveness of an economy depends on the real exchange rate — which, unlike the nominal exchange rate, the government has no control over — and by this measure, Argentina It is currently around long-term levels. average.

“With a prudent macroeconomic approach, including not printing more pesos than is needed, this exchange rate could persist for many years,” Marengo told me.

There are reasons to think that things may indeed be different in Argentina this time around: the government’s primary fiscal surplus is expected to reach 1.5% of GDP by the end of 2024, something that would have been unthinkable 12 months ago. Next year, economists at Banco BTG Pactual SA expect a positive result from the budget balance minus interest payments of 1.3%, while the current account deficit – the usual caveat for any foreign exchange problem – will be a very manageable 0.6% of GDP. The economy emerged from a long recession in the third quarter, growing faster than expected and is expected to grow 5% next year.

“The danger of an overvalued currency is to create deficits that are difficult to finance if it suddenly stops,” analysts wrote in a research note. “If this is the case, Argentina always has the opportunity to adjust its currency, but in 2025 Even 2026 looks unlikely.”

What’s more, for the first time among the many stabilization programs implemented in Argentina, there was both political will and social consensus to support budget cuts. Previous attempts to tidy up the government’s accounts have failed once politicians changed their minds or voters lost patience with austerity. There is no doubt that Millais has delivered on his shock therapy promise. The novelty here is that voters appear to support this sour remedy—at least for now.

What some Argentina observers overlook is that the country’s dual-monetarism makes it a rarity in global economic policymaking. Argentines use pesos for day-to-day transactions and dollars for what they care about most: investing and saving; as Brooks argued, devaluing the currency now would only accelerate inflation again, stifle the current rebound in economic activity, and damage the economy almost irreversibly. Millay’s political project.

Achieving the challenging parts – macroeconomic and financial stability, low inflation and growth in economic activity – is what Argentinian businesses and households need to thrive. Also critical is cutting regulatory and tax distortions to promote more competition, corporate restructuring and less state intervention, a microeconomic aspect of the Mire plan that often does not receive enough attention. The exchange rate is the result of all these variables, not the other way around; attempts to artificially keep the peso low by circumventing these reforms are doomed to fail. Likewise, letting the peso float while net international reserves remain negative is not only risky but suicidal. That’s what President Mauricio Macri tried in 2015, but ended in tears.

Don’t get me wrong, Milley’s experiment could still fail: Sustained fiscal surpluses may be impossible given new political and social pressures; central banks may be forced to abandon their monetary prudential policies; the international outlook may become bleaker; GDP recovery next year may be less than expected; politics may turn on an irascible president; and the withdrawal of capital controls may trigger volatility. At the end of the day, this is Argentina: yesterday’s performance is no guarantee that tomorrow’s results will be different. The odds of history are not in Millay’s favor. But judging from the current situation, there is no reason to believe that the country is heading for a new exchange rate crisis.

Argentina would be able to have a normal free-floating exchange rate like a modern economy, where peso fluctuations would not appear on the cover of every newspaper and talk show. It took decades of discipline, but it was doable—most Latin American countries achieved it this century.

For now, the country just needs to focus on addressing the underlying conditions that stand in the way of a new, saner normal.

More views from Bloomberg:

(1) In The Economist magazine’s global index last month, Argentina was the most expensive country after Uruguay, adjusted for per capita income (Buenos Airi, December 16 During a visit to a McDonald’s store in Sri Lanka, Big Macs were sold as menu options at 7,300 pesos and 10,500 pesos: equivalent to US$6.50 and US$9.30 respectively at the day’s parallel exchange rate, or US$7.1 respectively. US dollars and at the official peso exchange rate is 10.3 US dollars.

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

JP Spinetto is a Bloomberg Opinion columnist covering Latin American business, economic affairs and politics. He previously served as managing editor of the region’s economics and government desk at Bloomberg News.

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