July 22nd, 2024

Jittery markets rally after Argentina’s Milei gets his first legislative triumph on sweeping reforms

By Isabel Debre, The Associated Press on June 13, 2024.

BUENOS AIRES, Argentina (AP) – Wall Street rallied Thursday as Argentina’s President Javier Milei traveled to Italy for the Group of Seven summit, buoyed by his first legislative victory after the Senate passed sweeping proposals to slash state spending and boost his powers.

Having hitched his political fortunes to the goal of cutting down Argentina’s bloated state, Milei hailed the vote as a “triumph.”

Even so, opposition senators scrapped an income tax package and watered down other parts of the bill after a daylong debate marked by clashes between police and protesters in the capital of Buenos Aires.

The legislation aimed at overhauling Argentina’s long-troubled economy during its worst financial crisis in 20 years will return to Congress’ lower house for final approval, where it’s expected to become law.

In a further boost to Milei’s agenda, data released Thursday showed Argentina’s monthly inflation rate halving to 4.2% in May, the lowest rate since January 2022. The drop continues the string of declining inflation rates since Milei entered office last December, even as annual inflation remains at 276%, among the highest in the world.

After the bill’s passage, markets appeared reassured. Argentine sovereign bond yields jumped 3.5% on the news, and Argentina’s country-risk index dropped more than 6% when markets opened. Argentina’s currency, the peso, dipped to $1,220 on the black market, narrowing the gap between the official and informal exchange rates.

At the start of his daily press conference, presidency spokesperson Manuel Adorni paused to smile. “It’s a beautiful morning, no?” he said.

In Thursday’s early hours, Senate president Victoria Villarruel, Argentina’s vice president, broke a 36-36 tie in the upper house to give overall approval to Milei’s plans to trim the fiscal deficit, incentivize foreign investment and privatize some state-owned companies.

Milei delayed his flight to Italy until the Senate approval then jetted off, exultant.

The right-wing economist is the only leader since Argentina’s return to democracy in 1983 not to pass a law within his first six months as president. A defeat would have pitched his government into crisis.

“Milei has avoided falling off the cliff,” said Lucas Romero, director of the consulting firm Synopsis.

A populist outsider who rode to power attacking the establishment, Milei has found it impossible to enact his promised reforms without compromising. His 3-year-old political party, Liberty Advances, holds 15% of seats in the lower house and 10% in the Senate.

Liberty Advances made some key concessions, agreeing not to auction Argentina’s flagship airline Aerolíneas Argentinas, post office or radio and TV company. That left a handful of state-owned firms, such as an Argentine natural gas provider, on the block for possible privatization – falling far short of Milei’s ambitions.

The most significant measures now subject to lower house approval include a divisive article declaring a state of emergency in Argentina for one year and granting the president new powers in matters of energy, pensions, security, taxation and other sectors until the end of his term in 2027.

Another article allows for privatization of several companies, including Buenos Aires water and waste management company AySA, national road safety agency Corredores Viales, power provider Energía Argentina and airport service provider Intercargo.

An incentive scheme, central to Milei’s ambitions to lure foreign capital, would give lucrative tax breaks and other perks to foreign companies investing $200 million or more. They include exemptions from import tariffs and export duties for three years and preferable tax treatment for 30 years. Critics warn the measures will hurt local industry.

Changes to the labor market would make it easier for employers to fire workers by extending trial periods that allow dismissals without cause.

A tax amnesty would allow Argentines to register their undeclared assets at home and abroad without paying heavy taxes.

The Senate’s rejection of a few other measures – including the lowering of an income tax threshold and pension cuts for civil servants with fewer than 30 years on the job – complicates Milei’s fiscal consolidation.

Pressures are mounting over Argentina’s rapidly depleting foreign exchange reserves as the government struggles to repay its massive foreign debt, including $44 billion owed to the International Monetary Fund and $18 billion in a currency swap line with China.

On Wednesday, the central bank said it had agreed with China to postpone $5 billion in debt repayments that had been coming due in the next month.

Annual inflation in Argentina is nearing 300%, and Milei’s austerity is hitting the population hard. More than half of all Argentines now live in poverty.

The left-leaning Peronist movement, aligned with former president Cristina Fernández de Kirchner, decried the bill’s passage as the latest political catastrophe for Argentina, a country shaped by its brutal military dictatorship in the late 1970s.

“We were able to overcome the dictatorship, and surely this is going to be a new, different challenge,” said Agustín Rossi, the former chief of staff. “We must think about a post-Milei Argentina.”

The approved legislation marks a sharp reversal from Peronist administrations that ran vast budget deficits financed by printing money.

That has already reassured jittery markets.

“The Milei government showed it’s on a political learning curve, which is positive for investors and markets whose main concern is how much of his reform promises will materialize,” said Marcelo J. García, Americas director at geopolitical risk firm Horizon Engage.

But the razor-thin vote means that Milei’s victory comes “at an extremely high cost,” said Mariano Machado, analyst at risk intelligence company Verisk Maplecroft. He said roadblocks cannot be ruled out as the bill heads back to the lower house.

Hours after the Senate approval, the government sent mixed messages about some hard-won compromises.

“We are going to insist on the privatizations of the airlines and the postal service,” said Interior Minister Guillermo Francos, recently appointed to broker negotiations between the Cabinet and opposition lawmakers. “We will try to recover these measures in the Chamber of Deputies.”

Opposition lawmakers have described the sale of those state companies as a red line. Union leaders in Argentina’s aviation industry have said they will fiercely resist privatization.


Associated Press writer Almudena Calatrava in Buenos Aires, Argentina, contributed to this report.

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