Argentina's new govt launches financial measures to tackle exchange rate volatility, fiscal deficit

Argentina's new government is moving fast to turn around the country's economy.

The government is set to unveil a "structural reform plan" in the coming weeks, presidential spokesperson Manuel Adorni said Wednesday.

A day earlier, Economy Minister Luis Caputo announced the first set of measures implemented by President Javier Milei's administration to shrink the fiscal deficit, including loosening exchange rate controls, scrapping energy subsidies and reducing the size of government.

With new measures launched, Caputo said the new administration was tackling the high levels of poverty and a crippling fiscal deficit exceeding 5.5 percent of gross domestic product (GDP) in the country.

"It is a package of measures that were necessary and inevitable for what is coming in the coming weeks, which will effectively be the structural reform plan that will give rise to this different Argentina that we are talking about," Adorni said at a press conference.

These "urgent" measures aim to balance public-sector accounts, "avoiding a catastrophe" and a scenario of hyperinflation, with a direct impact on the rise in poverty levels in the country, he said.

Public works tenders have been suspended, with approved but pending projects canceled, and any future infrastructure works are to be handled by the private sector.

As part of public-sector adjustments, income will be increased by 2.2 percent while expenses will be reduced by 2.9 percent, and the number of ministries will be slashed in half, from 18 to nine as well as a 0.4 percent cut in pensions.

Measures include hikes in export duties and the PAIS Tax, the tax that applies to the direct or indirect purchase of foreign currency, are expected to impact the country's main prices since many of these imports are necessary inputs for production.

The peso's official exchange rate was readjusted to $1 to 800 pesos, to bolster the export sector.

Regarding imports, the current Import System of the Argentine Republic, a state control mechanism over purchases abroad, will be modified to serve more as a "statistical and import information system that will not require a prior approval license."

As part of the belt-tightening measures, resource transfers from the central government to the provinces will see a "reduction to a minimum," officials said.

Cuts in energy and transportation subsidies will take effect in 2024, expected to reach a 0.7 percent improvement in GDP.

"This leads us to an expected zero deficit," said Adorni.

Due to the measures' expected impact on the average Argentine's pocketbook, the government plans to preserve and in some cases strengthen social programs that protect the most vulnerable against high inflation, including the Universal Child Allowance, a program to help unemployed mothers or fathers, those with incomes below the minimum wage, or those with children with disabilities.

'Radical' economic policies

Caputo acknowledged the government's "fiscal shock" therapy to fix the ailing economy will make life "tough" for average Argentineans in the coming months.

In a televised interview Wednesday night, Caputo defended a package of measures unveiled earlier this week since President Javier Milei took office Sunday.

"We are convinced that a strong and credible fiscal anchor, added to what we are doing, is going to stabilize" the economy, Caputo said.

Caputo said the ministry is creating the conditions to attract U.S. dollars "because continued capital flight is very costly."

Financial markets reacted well to the government's strategy, said Caputo, describing it as "an enormous vote of confidence."

Another immediate positive impact was that the difference between the official and unofficial exchange rate "went from 20 to 25 percent. The gap is at the same levels as December 2019, when the last administration started," said Caputo.

Caputo admitted the coming months "are going to be tough" for people, with notable increases in the cost of transportation, energy and public services.

"What people are going to pay for are the consequences of the previous economic policy," he said, adding, "That is what happens when they insist on populist policies that do not work."