In Argentina, Milei achieves a historic surplus, but poverty is on the rise; understand in five graphs

The president of Argentina, Javier Mileimade a statement last Monday, 22nd, on national television to celebrate the first quarter with financial surplus in the country since 2008. A feat that has been praised by International Monetary Fund (IMF) and by many politicians and economists who defend the necessary measures to try to heal the Argentine economy.

For many analysts, however, the result could be achieved at the expense of increasing poverty, which affects around one million new Argentines per monthand with a record drop in consumption, causing anxiety in the country’s business sectors.

On a trip by Economy Minister Luis Caputo to Washington, where he participated in the new round of negotiations on the country’s debt with the IMF, the Milei government heard praise. In a statement, the US Treasury Department said it was “impressive the progress made [na Argentina] to reduce inflation and the accumulation of foreign currency”, but also noted the need to maintain social care, a warning that the IMF had already made.

Tightening of salaries and pensions

“Obviously, from the government’s point of view, the fact that for the first time in more than ten years Argentina has achieved a financial surplus is a very positive fact”, observes economist Juan Manuel Telechea. “The question is how this result was achieved. This is largely explained by the adjustment in public spending and more than half of this adjustment was achieved through the reduction of salaries and pensions.”

According to calculations, 45% of the first quarter’s result is explained by cuts in salaries, pensions and social programs; another 20% would be the reduction of public works and the rest was obtained by ending subsidies and increasing taxes.

Formal salaries lost 20% between December and February, despite the agreed adjustment, which brought a nominal increase of 38.5% in those same three months, insufficient for inflation of more than 70% in the same period.

The month still does not reflect the “tariff” which was an increase in the price of essential services such as energy, gas and fuel, whose jumps were in the hundreds of percentages this month, which puts even more pressure on purchasing power.

Poverty on the rise

According to projections from the Torcuato Di Tella University, around 48.3% of Argentines were below the poverty line in the analysis period that runs from October to March. In the first quarter alone, the number of poor people would be 22.3 million, an increase of 3.2 million compared to the previous period, with practically 1 million people falling below the poverty line per month.

The projection, led by economist Martín González Rozada, combines data from the statistics institute, with the current value of the basic food basket, inflation and salary variations to update the estimates, as official poverty data has a lag of one semester.

Consumption and production plummet

This loss in purchasing power also resulted in a drop in consumption. In March, Argentines consumed 7.5% less, almost doubling the February rate, which had been 4.1%. The data comes from the specialized consultancy Scentia, released this Tuesday, 23, by the newspaper Clarin.

In total, the first quarter accumulated a drop of 5.1%. The value is higher than the periods of the pandemic, whose record was a loss of 4.5% in October 2022. Milei’s first months contrast with the last months of Alberto Fernández, who even registered positive consumption rates above the 7% – very explained, however, due to the rush to spend a currency that was in galloping devaluation.

Together with consumption, industrial production fell 19.1% in the last three months compared to the same period in 2023. “The companies surveyed operated in March with 70% of their installed capacity, showing a drop of 0.8 percentage points compared to February. There are sectors with high levels of stocks that find themselves divided between continuing to produce so as not to cut the process and having to lay off staff or slow down”, says the Came report published on Monday.

“If we do not achieve an economic recovery, this will mean a very deep recession, with a drop in purchasing power and company sales that is not sustainable over time”, adds the economist.

Dollar and the ‘block’

With this scenario, the doubt is about the sustainability of the positive results. In these three months, Milei managed to reverse the downward trend in Argentine inflation, registering a slowdown in the last three months. The index, however, remains the highest in the world and promises to be pressured by recent price increases.

The maintenance of the slowdown – in which the government hopes to reach single digits next month – will depend on the future of the government’s economic reforms, frozen by political conflicts.

Expectations are also around a great promise from Milei upon assuming the presidency, which is put an end to the “block”that is, the barrier to the purchase of dollars created by the government of Cristina Kirchner. With the end of the blockade, the unification of the dollar is expected, which today has several exchange rates.

“I think the conditions are not yet in place, and it seems to me that the government is clear about this, because a few months ago we were talking about removing it as soon as possible, including in April or May, but the discourse has already changed and there is already talk of second semester or until next year”, observes Telechea.

This is because, although the Central Bank has resumed accumulating reserves – another fact celebrated by the Milei government – when the control barrier is removed, there will not be enough dollars to meet the rush for the currency.

Without removing the block, there remains uncertainty about the future of the country’s various exchange rates, especially the parallel one called “blue”. Economists do not rule out the need for a further devaluation of the currency, as the value of the dollar has not kept pace with inflation.

“The possibility of exchange rate devaluation is always present. What happens is that currently the market is not worrying much about this”, explains Telechea.

“When looking at expectations of devaluation, basically what you can do is look at future dollar prices, which are established in the market and are in line with what the government proposes, at least for the coming months. Of course, this does not eliminate the possibility that, if the Central Bank starts to lose reserves or if there is political turbulence for some reason, these expectations could change quickly and this could generate pressure and result in a devaluation of the exchange rate.”