[Insight & Opinion] Economic Reforms of Argentina's New Government

Peso Devalued by 54%
Initial Market Response Positive
Debt and Social Unrest Remain the Biggest Challenges

On the 10th, Javier Milei was inaugurated as the new president of Argentina. Calling himself an 'anarcho-capitalist,' he immediately reduced government ministries by half. The main reason he, with little political experience, won the presidential election was the voters' desire for dramatic change amid severe economic hardship, especially among angry young voters. Foreign exchange reserves have been depleted, inflation has reached about 140%, the peso currency has depreciated by 90% over four years, and 40% of the population lives in poverty. Voters were enraged by the previous government's incompetence and corruption.

The new government devalued the peso by 54% just two days after taking office. The official exchange rate sharply changed overnight from 366.5 pesos per dollar to 800 pesos. The central bank also announced plans to maintain interest rates at 133% and to reduce the peso's value by 2% monthly. Previous administrations had tried to prevent peso depreciation for years through foreign exchange controls and import restrictions, aiming to conceal the depletion of foreign reserves and prevent capital flight. The market initially welcomed these measures. The new government also announced plans to cut fiscal spending by 2.9% of GDP through reductions in subsidies in energy and transportation sectors and halting public works. They intend to temporarily raise some taxes to increase fiscal revenue by about 2.2%, aiming to significantly reduce the fiscal deficit, which is about 5% of GDP, by next year.

However, the costs of reform occur immediately, while the benefits are uncertain and long-term. The sharp depreciation of the peso is causing prices to rise again. Cuts in fiscal spending are expected to increase the burden on low-income citizens. Some analysts predict Argentina's GDP will shrink by about 3% next year, anticipating backlash from youth and lower-income groups. The problem is that President Milei's party holds only 7 out of 72 seats in the Senate and 38 out of 257 seats in the House of Representatives. Not a single provincial government is controlled by the ruling party. In the past, the ruling party typically held about 45% of the legislature. The Peronists, who form the majority in Congress, have declared they will fight against Milei's austerity policies. Powerful labor unions are also signaling government opposition. Most past presidents from non-Peronist factions resigned due to protests opposing economic reforms.

Another major issue is debt. Argentina's national debt exceeds $400 billion, with $44 billion owed to the International Monetary Fund (IMF) alone. In January next year, Argentina must pay $4 billion to the IMF and other creditors. Debt repayments maturing next year total about $16 billion. Securing this money is an urgent task. Argentina needs debt restructuring. Failure could lead to its 10th default.

There is hope for President Milei, who has withdrawn extreme pledges such as closing the central bank and adopted a more pragmatic approach. He is also showing a realistic view toward China, which initially faced his harsh criticism. China accounts for nearly 10% of Argentina's exports, and the two countries have signed a $20 billion currency swap agreement. Moreover, Chinese companies are deeply involved in Argentina's lithium and infrastructure projects.

But above all, the biggest challenge for the Milei government is to suppress social unrest. Many Argentinians, exhausted by years of economic crisis, may give him time to reform the current situation, but public patience will not last long. We cannot simply watch the Argentine crisis from afar. We must face the reality of our own economy, where household and corporate debt have reached unsustainable levels, and prepare countermeasures.

Kim Dong-gi, author of ‘The Power of the Dollar’

This content was produced with the assistance of AI translation services.