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Argentina’s next president Milei must curb inflation and turn around the economy

BUENOS AIRES, Nov 20 (Reuters) – Argentina’s libertarian President-elect Javier Milei has won a closely fought election. Now comes the hard part: dealing with economic crises.

Inflation is at 143%, net foreign exchange reserves are deep in the red, savers are abandoning the peso and a recession is looming – if not now. Four out of ten Argentines live in poverty and a sharp devaluation of the peso is likely.

Milei, who is promising economic shock therapy such as central bank closures and dollarization, won a second-round runoff on Sunday with around 56%, rivaling Sergio Massa’s 44%.

Milei now faces the big challenge of getting the economy back on track once he takes office on December 10th. Failure could lead to the already struggling country suffering a tenth national bankruptcy, increasing poverty and social unrest.

“It is an economy that is in intensive care,” said Miguel Kiguel, a former undersecretary for finance at the Economy Ministry in the 1990s.

INFLATION

Argentina’s high inflation rate creates huge distortions in the markets and for consumers as prices change weekly. A central bank analyst survey forecast inflation of 185% by the end of the year.

“One of the biggest challenges for the next government will be to correct the distortion in relative prices that the economy has today,” said Lucio Garay Mendez, an economist at consultancy EcoGo.

“In the context of high inflation and a stabilization plan, a correction is inevitable.”

To curb inflation, Argentina’s central bank raised the key interest rate to 133%, encouraging savings in pesos but hurting access to credit and economic growth.

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Weight control

Argentina’s peso currency has been shackled by capital controls since a market crash in 2019, leading to a confusing set of exchange rates that have seen dollars trade at well more than double official levels near 350 per dollar.

Popular unofficial exchange rates include the “blue” dollar, the MEP, and the blue chip swap, although demand for dollars through parallel channels has produced dozens of different exchange rates over time, including a “coldplay dollar” and a ” Malbec dollars”.

Milei has promised to quickly lift capital controls and eventually dollarize the economy, while a sharp devaluation in the near term is likely to cause official and parallel interest rates to converge.

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CENTRAL BANK RESERVES

Argentina’s central bank’s foreign exchange reserves are near their lowest level since 2006 and are widely seen by analysts as being in net negative territory after a major drought hit exports of key crops such as soy, corn and wheat.

The low reserves threaten the country’s ability to repay debts to major creditor the International Monetary Fund (IMF) and private bondholders, as well as cover important imports. Argentina needs to overhaul its $44 billion IMF program.

The government has agreed to an expanded currency swap with China to cover some of its costs and has had to delay some payments to key trading partners such as Brazil.

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RECESSION

Latin America’s third-largest economy is expected to contract by 2% this year, partly due to the impact of the recent drought that caused corn and soybean harvests to halve, according to the central bank’s latest analyst survey.

This, combined with triple-digit inflation, is likely to worsen poverty, with two-fifths of people already living below the poverty line as salaries and savings fall.

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Silver lining?

Argentina, rich in grain, shale gas and lithium, could see a rebound next year as better rains benefit crops, a new gas pipeline reduces reliance on costly imports and demand for lithium for electric vehicle batteries increases.

Much higher harvests are expected for soy and corn, which will bring in much-needed foreign currency.

“The harvest will contribute to a greater flow of income in the economy, as will the greater production of (shale oil formation) Vaca Muerta,” said Eugenio Marí, chief economist at the Libertad y Progreso Foundation.

Reporting by Hernan Nessi and Eliana Raszewski; Editing by Adam Jourdan, Daniel Wallis and Chris Reese

Our standards: The Thomson Reuters Trust Principles.

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