Argentina: Milei stabilization program enters “phase 2”, but many unknowns remain | International

Argentine President Javier Milley’s plan to stabilize the South American country’s battered economy has entered the implementation phase. “level 2” The future of the exchange rate system has more unknowns than certainties. Fundamentally, Questions about how and when the economy will recover significantly and inflation will slow significantly.

(Read here: Argentina denies IMF pressure to devalue its currency)

last Friday, The Argentine government announced the economic stabilization plan launched by Milei last December After the first phase of vigorously adjusting the fiscal balance, we entered the second phase, with the focus on the thorough cleanup of the central bank’s balance sheet. ‘Shock’.

Among other things, the Central Bank of Argentina (BCRA) will stop issuing currency to pay interest on its debt obligations, its second largest issuance “tap” after that aimed at financing the treasury deficit. The government is the main reason for Argentina’s high inflation (276.4% year-on-year and 4.2% in May).

(Follow: Why, for Nicolás Maduro, Javier Milley is “destroying” Argentina’s economy?)

For it, Central bank’s paid liabilities to be replaced by government bonds: Bank They will place excess liquidity not in passive tokens (an instrument issued by BCRA) but in currency regularization notes issued by the Treasury.

“In return, the Treasury will increase market debt at a floating rate and pay more interest, which will require a larger primary surplus to maintain the fiscal surplus.” Delphos Investment said in a report.

How governments will prolong strong fiscal adjustments with the economy still contracting and poverty rising is one of the biggest unknowns beyond forecasts. ‘fresh air’ He believes he has achieved that goal with the recent parliamentary approval of the plan. Economic reforms promoted by Mire.

The economy of Argentina.

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After this process, the only source of currency emission will be The purpose of central banks buying dollars is Rebuilding depleted monetary reserves.

And million dollar solutions ‘place’, A type of liquidity insurance on debt securities granted by BCRA. This requires agreement with the bank.

(See here: The achievements and failures of Argentina’s economic policy)

The announcement “level 2” It occurred against a backdrop of growing skepticism among investors, who began to believe that a change in exchange rate policy was necessary. Committed to unifying the multiple types of exchanges that coexist in Argentina And the so-called open “Exchange of stocks”.

However, the government said on Friday that the long-awaited removal of currency restrictions was one of the main campaign promises. Leading to Milei’s victory in the 2023 electionwill remain in the third phase of the program, with no clear deadline and subject to certain regulations “parameter”.

Javier Millais, President of Argentina

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For LCG Consulting, ‘The government continues to send confusing signals’ An unclear path for the future of foreign exchange and currency management “Vague messages from officials and the president himself, who have mentioned various alternatives, such as dollarization, currency competition (without defining what it is), endogenous dollarization, exiting the stock market, etc.”