The economic data for January, Milei’s first full month in office, makes for sobering reading.
Argentina’s latest descent into the economic abyss is as sad as it was predictable. In mid-December, I warned that Milei’s first dose of shock treatment, now being administered with relish by new Economy Minister (and ex-JP Morgan Chase banker, former finance minister and former central bank governor) Luis Caputo, risks wiping out what remains of Argentina’s fragile economy. Said treatment includes a 54% devaluation of the Argentine peso; a halt on all public works; the freezing of public sector salaries and pensions; a sharp rise in taxes, and the elimination of many public subsidies, including for energy and public transportation.
Now, the economic data is emerging for January, Milei’s first full month in office, and it makes for scary reading. But before we get into the nitty-gritty, a reminder: the economic pain currently being visited upon millions of Argentinean workers and pensioners is an integral part of Milei’s economic plan. It is not an unfortunate by-product or unintended consequence; it is the intended goal — to impoverish workers and pensioners to the point where they cannot fill their shopping basket or buy even the most basic of necessities. If you starve the economy of demand, inflation eventually has to go down.
Last week, El Economista published an article titled: “Due to the monetary squeeze, inflation and recession, savers sell dollars to make ends meet”. The article was harshly critical of the government’s brutal austerity regime but that didn’t stop Milei from proudly retweeting it. Presumably, he never bothered to read the text.
As I noted in my December 15 article, “Who Is Luis Caputo, Argentina’s New Economy Minister (Who Is Already Making the Economy Scream)?” most Argentinians, many of whom voted for Milei out of an understandable mixture of desperation, frustration and anger with the establishment parties, face a crushing loss of purchasing power, both in pesos and dollars, as the devaluation and rising taxes drive inflation even higher while wages and pensions stagnate and public subsidies on energy and public transport are withdrawn.
Stagflation on Steroids
Prices are indeed surging. On a year-by-year basis CPI increased from 211% in December to 254% in January, its highest level since 1990.
The 54% devaluation of the Argentine peso obviously played a key part in this. So too has the removal of subsidies for many basic goods and services, including energy and public transportation, as well as the sharp rise in taxes, including import taxes — from a man who repeatedly said before the elections he would rather cut off an arm than increase taxes. The price of just about everything is surging — everything, that is, except salaries. In a country where the poverty rate is already above 40%. As NC has reported before, this kind of austerity literally kills, through desperation, suicide and lack of access to basic health services.
The one silver lining? Inflation did fall on a month-by-month basis from 25% in December to 20% in January. In other words, the price rises may be in the process of plateauing — which is perhaps no great surprise: when you throttle economic activity and opportunity, price rises tend to slow. But so too does everything else.
A Historic Collapse in Real Salaries
In December — and keep in mind, Milei only took over the reins on the tenth of that month and didn’t issue his Decree of Necessity and Urgency until the twentieth — industrial and construction output plunged 12.8% and 12.2% year-on-year, respectively. According to a Reuters survey, economic activity fell 2.5% year on year. In January, things got even slower. From Infobae (translation my own):
“All the available data — particularly those relating to the domestic market — show a notable deterioration [in January], not only in annual terms but also compared to the figures for December: car registration leads the decline, with a variation of 33% year-on-year ( vs. -5.8% in December), followed by retail sales (-25.5% year-on-year vs. -18.7% the previous month) and construction (-28.2% vs. -17.4% in December)”, reported the consulting firm Invecq. Cement deliveries also fell by 20% (-12.9% in December), motorcycle registration by 19.2% (it had increased by 16.7% in December), and car production by 16.7% (vs. -0 .4% in December). Finally, national taxes linked to economic activity fell between 15% and 25% annually on a real basis…
A similar exercise was carried out by the consulting firm 1816. The indices it included in its survey of preliminary economic activity data are the same as Invecq’s, but it added to the equation the fall in salaries, which has an impact on mass consumption. “Although inflation data marks a clear slowdown (25.5% in December, around 20% in January, most likely less than 20% in February), the flip side is the brutal recession signposted by high-frequency indicators…. In December, the real salary of registered private-sector workers suffered the largest monthly drop in at least 30 years, and it is highly likely that in January real salaries reached a lower level than that of the 2001 crisis.”
This is one of two stunning data points revealed by the research. For those unfamiliar with Argentina’s recent history, between 2001-02 the country went through what should have been a once-in-a-lifetime economic crisis (but this being Argentina it probably wasn’t). Three developments occurred in rapid-fire succession — a partial deposit freeze, a partial default on public debt and abandonment of the fixed exchange rate — triggering a near-vertical collapse in economic output, soaring levels of unemployment, and political and social unrest.
Families lost their life savings in the “corralito” of late 2021, when the then-Economy Minister Domingo Cavallo limited cash withdrawals to 250 ARS (1 ARS = 1 USD), and then the “corralon” of 2002, when most deposits were forcibly exchanged for a series of bonds denominated in heavily depreciated pesos. The corralito was supposed to be kept secret until it came into force but was leaked beforehand, causing a bank run in which few — mainly well-connected banks and corporations — benefited while millions lost more or less everything. The subsequent nationwide protests eventually brought down the De la Rua government.
Incidentally, it was Domingo Cavallo who set the stage for the 2001-02 crisis ten years earlier by establishing a fixed pegging of one-to-one parity between the peso and the U.S. dollar that had absolutely no basis in economic reality. Guess who Milei’s all-time favourite economy minister is? That’s right: Domingo Cavallo.
Now for the second stunning data point. Again, from Infobae (emphasis my own):
“The economic activity data for January may not be surprising, but they are no less eye-catching: sales of cars and motorcycles, cement shipments, sales of construction supplies, retail sales, tax revenues,… everything fell between 15% and 30% year-on-year,” reports 1816. “Food sales in retail stores fell 37.1% year-on-year in the month, something not seen even during the early months of the pandemic. This does not mean that 37.1% fewer calories were consumed, though there was certainly some of that as well as substitution for inferior goods and lower priced brands, given the index does not measure quantities but rather turnover in pesos.”
Remember the El Economista article: by January, many in the middle classes were selling their dollar-based savings just to make ends meet. Many of those without dollars simply ate less food. In January, food prices were up threefold on a year-by-year basis. In a perverse irony, as the social crisis deteriorates, more and more people are turning to soup kitchens, yet in December the Milei government froze all public funds to soup kitchens, food banks and pantries while the current system is audited.
CNN’s Spanish-language channel featured an interesting report comparing basic food prices and salaries between Argentina and Spain. What it found was that while both countries have similar prices for the different products that make up the basic food basket, the purchasing power of Argentinean salaries is roughly nine times lower than their Spanish counterparts.
In fact, Argentina has one of the lowest minimum wages in Latin America today. The current floor for the Minimum Living and Mobile Wage (SMVM) is just 156,000 pesos per month ($184). And it is not going any higher even as inflation rages, says Milei. In other words, workers at the very bottom of the income scale are about to get even poorer. Even the income of most higher paid workers is rapidly losing purchasing power. As prices continue their rise, people will inevitably consume a lot less, heaping even more pressure on struggling small and even mid-sized retail businesses.
All of this is necessary to bring inflation into line and balance the fiscal budget, says Milei. But as public anger and desperation rise while poverty levels surged eight percentage points in January alone, to reach an alarming 57%, time is one luxury his government does not have. Trade unions in many sectors, including healthcare and transportation, are calling for strikes to demand salary increases. Meanwhile, the government’s sweeping “omnibus law”, which the president once said “may well determine our country’s destiny,” was recently rejected by Congress.
As uncertainty reigns, most overseas investors are wary of parting with their cash just yet. Foreign banks are adopting a wait-and-see approach to investing in Argentina and advising their clients to do likewise.
“In order for us to support the private sector in Argentina, there is still a need for macro stability and a higher [interest] rate,” Jordan Schwartz, the executive vice president of the Inter-American Development Bank, told Clarin. “The social crisis is the frontier that must be crossed successfully.”
A similar message was relayed by a number of investment fund managers: the social crisis created by Milei’s economic policies must first be overcome before funding will be made available for businesses. Until then, said Schwartz, there will be no financial support for Argentina’s private sector.
Ominously, even the International Monetary Fund (IMF), whose second-in-command, Gita Gopinath, met with Milei this week to discuss Argentina’s economic challenges, already downgraded its economic forecast for the country in its January report, predicting a 2.8% recession in 2024. One can expect further downgrades in the months to come, as even Milei himself has warned that the worst is yet to come. By 2025, however, the IMF expects the economy to bounce back in spectacular fashion (+1.9%). But as the Greeks (and other long-suffering nations) well know, the Fund has an annoying habit of forecasting miraculous mid-term recoveries for hair-shirt economies that never quite materialise.
* Of course, this is Argentina we are talking about, a country that has, for a host of reasons, been in a near-constant state of crisis for most of its history, as Jeffrey Sachs said in a recent interview with The Duran. As such, another corralito-type event is not out of the question.
