When Argentina was mentioned just a year ago, economists immediately thought of three things: skyrocketing inflation, the devaluation of the Argentine peso, and government default.
These issues became defining features of the Peronist and, later, Kirchnerist governments. However, as history has shown, trying to combat inflation by increasing public spending doesn't work in practice and pushes the population to
seek refuge in XAUUSD or BTC.
The same can be said of price controls, rent controls, multiple exchange rates, and capital controls.
All of these only worsened the situation so much that Argentina became the only country in modern economic history to go from being a wealthy nation to the category of middle-income countries.
Public discontent led to the election of
far-right libertarian candidate Javier Milei, who promised change with his "chainsaw" policies. It's been over a year since he took office, and the effects are already evident.
Despite some criticism, the budget deficit has been reduced to zero for the first time in 100 years, and inflation, which was at 25% per month in December 2023, has dropped to 2.7% per month.
This has allowed the Central Bank of Argentina to significantly lower its key interest rate, from 126% when Milei took office to a more manageable 35% by November. This is crucial for the economy's development.
Lower rates will ease the burden on the population and companies with existing debt and make credit more accessible for development and consumption, both of which are crucial for GDP growth.
Not for nothing has the Merval index risen more than 175% in the past year,
outpacing the S&P 500, Nasdaq, and other emerging market indices. The country’s CDS price has also dropped to a four-year low.
However, these gains have come at a cost: in his first 10 months, Milei cut public spending by 31%, laid off thousands of public employees, and closed half of the ministries, triggering protests.
The cuts in government spending sped up the decline in GDP. In the first quarter of 2024, GDP shrank by 5.1%, following a 1.2% drop in the last quarter of 2023. For all of 2024, GDP is expected to shrink by 4%.
Yet, Milei recently proudly announced that
Argentina has exited the recession, growing 3.9% in the third quarter, the first growth since the end of 2023. For next year, GDP is expected to grow by 5-6%.
Overall, if Javier Milei's economic measures continue to improve the country's outlook, this could attract more investment, further accelerating the recovery from previous policies.
This article was written by FL Contributors at
www.forexlive.com.
