Following the election of Javier Milei, the international financial market has turned its attention to the need for urgent and profound reforms. Despite Milei’s first speech as president-elect being characterized by unexpected moderation and the economist avoiding referring to his two battlehorses during the campaign, such as dollarization and the closure of the Central Bank, investors believe that Milei’s plan libertarian is “bold” and can threaten financial stability.
Moody’s Investors Service vice president Jaime Reusche stated that while Milei proposed strong measures during his campaign that could eventually address Argentina’s economic imbalances, these measures could cause an abrupt and deep economic adjustment if enacted as described. The consensus necessary to carry out these reforms will be influenced by a Congress divided and social pressures, Reusche added.
JP Morgan also placed its magnifying glass on the risks of implementing the measures announced by Javier Milei during the campaign. The main challenge for President-elect Milei is that it may be hampered by political maneuvering due to governance risks, given the lack of party structure and also the distribution of power in Congress after the elections generals. In a report for its clients signed by economists Diego Pereira, Lucila Barbeito, and Gorka Lalaguna, JP Morgan warned: “The main pillars on which Milei built its narrative throughout the campaign have been dollarization and reduction of State size in economy. However, this decision could not be made for another year.” They anticipated that in short term upon taking office they expect a realignment of anticipated exchange rate with level consistent with parallel exchange rate to realign relative prices firmly allowing capital controls gradually removed.” This adjustment should be accompanied by draconian fiscal adjustment to compensate for loss seigniorage income creating necessary incentives rebuilding central bank foreign exchange reserves,” they added.
Regarding capacity for adjustment, JP Morgan believes that “need quickly close fiscal gap in sustainable manner should be axis any stabilization program necessary anchor generate credibility future”. They forecast a considerable fiscal consolidation effort next year with primary fiscal balance consistent with overall result -1.7%.