The year 2024 will go down in history as one of the most surprising ever for the Argentine economy. It was preceded by another unusual event, this one political in nature: society decided to burn its bridges and elect Javier Milei as president, an outsider with a proposal as bold as it was uncertain.
The libertarian leader attacked what he considers the origin of all Argentina’s economic ills: the fiscal deficit. He did this almost without hesitation, giving rise to at least three results that, a priori, were highly improbable: he achieved a surplus in the Treasury accounts, society tolerated and largely endorsed an unprecedented adjustment, and he is tackling inflation while economic activity starts to recover.
From deficit to surplus
The president is not wrong when he says that he carried out the most significant adjustment in history. Argentina went from a primary deficit of about three points of GDP in 2023 to a surplus projected at around 2% for 2024, a difference of almost five points.
In line with the recession, tax revenues fell by 7% year-on-year in the first eleven months of 2024, but the cut in primary spending was much higher at 32%.
Milei won the elections promising that the adjustment would fall on “the caste” — his epithet for career politicians, state employees who got their roles through nepotism, and other such privileged miscreants. That said, one of the sectors that contributed most to the containment of expenditures was pensions, which fell by 22%. They were followed by subsidies (cut by 33%), public salaries (-27%), capital expenditures (-71%), and transfers to provinces (-87%).
Incidentally, austerity was not the preserve of the national government. Argentina’s provinces also tended to balance their budgets. In the last 12 months, all ran a primary surplus except Buenos Aires and Entre Ríos, according to economist Martín Polo de Cohen.
Analysts debate how the libertarian government has managed to get society to accept an adjustment of this magnitude. There is, it appears, no single explanation. The lack of credibility in politics led people to vote for Milei and accept the “sacrifices” that the libertarian leader announced.
Containment
But the administration also showed signs of pragmatism. It assisted the most vulnerable by increasing the Universal Child Allowance (Universal Child Allowance, or AUH, as it is commonly known) by more than 100% above inflation. That went hand in hand with a real-terms increase in the value of the Alimentar card.
The government also says that Human Capital Minister Sandra Pettovello’s work to eliminate the “intermediaries” in social programs has facilitated a significant increase in these benefits. (Under the previous government, social movements often administered state welfare programs, a setup that was mired by accusations of pilfering.) According to official calculations, these “poverty managers” kept anywhere between 10% and 50% of the funds.
The income distribution report for the third quarter of 2024 suggests that poverty was around 38.8%, after the peak of 54.8% reached in the first quarter of the year. That would indicate that the worst of the crisis has passed. It should be noted that Alberto Fernández ended his mandate with that figure at 41.4%.
Inflation
The fiscal surplus, together with the reduction of the monetary excess, led to a slowdown in inflation that was higher than most analysts expected. After starting in December of last year with 25% (driven by the devaluation of the peso), the index fell progressively to 2.4% in November.
Significantly, this slowdown is occurring together with a readjustment of relative prices. Thus, data through November showed that electricity, gas, and water rates rose 276% interannually, well above the 166% increase of the consumer price index overall.
The dollar and the stocks
Another of the government’s greatest achievements was the stabilization of the exchange market. At the start of the year, the cash with settlement (CCL) dollar rate was around 1,300 pesos and the gap with the official rate was of over 60%. The year is ending with a lower CCL rate in nominal terms — of around 1,200 pesos at the time of writing — and a gap of less than 10%.
In recent months, the treasury has been progressively easing the currency controls known as the stocksbut both Milei and Economy Minister Luis Caputo have steadily insisted that the restrictions will not be lifted in their entirety until they are sure there will be no turbulence in the exchange market.
More than one analyst has expressed concern about the loss of positions of the dollar. Indeed, the peso has tended to appreciate and the real exchange rate is approaching levels like those it had at the end of 2017 or in the final stage of Convertibility, that is, moments that preceded a correction.
The economy ministry points out that this time is different because we are facing a much more orderly economy.
However, recent episodes, such as the fall of the Brazilian currency throughout the year — it went from less than 5 to more than 6 reales per dollar —- the recent international strengthening of the U.S, currency, or the drop in international soybean prices (currently around 350 dollars when at the end of last year it was 480), are giving pause to more than one economist. This is even more so when net reserves remain negative by about 5 billion dollars.
Employment
The activity rate was stable at 48.3% in the third quarter of 2024. The employment rate was 45%, with a slight decrease in unemployment, at 6.9%.
Informal work is growing, as evidenced by a drop of 379,000 formal employees (3.7% year-on-year) and an increase of 378,000 non-salaried employees (+7% year-on-year). There was also a slight increase of 4,000 informal employees.
Activity
With the expansion of families’ purchasing power and the reappearance of credit, the most recent indicators show a gradual increase in consumption that would tend to promote industrial activity.
The official commitment is to free the private sector from all regulations that make business activity more expensive or hinder its development. Deregulation Minister Federico Sturzenegger has a key role in this endeavor.
It is striking that, despite the harsh austerity measures it has taken, the government retains a high positive image remains high — between 47 and 57%, according to the different consulting firms. Opinion polls show that the population continues to be optimistic about the future, both in a personal sense and regarding the country as well. This is one of the reasons that explain the high level of international interest in the Milei administration.
Regarding 2025, it will be a year of challenges for the government: maintaining what has been accomplished, strongly increasing activity, and consolidating these achievements at the ballot box.
