Argentina struggles to prevent economic collapse following shock primary victory

Argentina is under increasing pressure to devalue again its currency as it struggles to prevent economic collapse in advance of the October elections, following a shock victory by a radical rightwing presidential candidate at its primary election.

After the victory of outsider candidate Javier Milei, the black-market dollar has jumped up to almost twice the new official rate.

The black market exchange rate is currently 705 pesos per dollar. This means that the highest denomination banknotes in circulation are worth less than $3. This forces Argentines carry large amounts of cash. Officially, the rate is 361 pesos per dollar.

Salvador Vitelli is the head of research for Romano Group, Buenos Aires. “[Economy Minister Sergio] Massa’s path to avoiding a collapse prior to the election gets narrower, shakier, and more winding,” Vitelli said. “The problems get worse, and possible solutions only end up creating more problems,” said Salvador Vitelli, head of research at Romano Group in Buenos Aires.

After Milei’s win on Sunday, voters felt an immediate shock in their wallets. Prices of consumer goods increased by double-digits over night as the government devalued pesos and raised interest rates up to 118 percent a year to restore confidence.

Laptops and other electronic items saw price increases of up to 20 percent as retailers marked up imported products in order to compensate for peso’s recent downward spiral.

As a result of pressure from the public, Argentina announced on Tuesday that it would suspend beef exports during the next two weeks to help limit the rise in domestic prices after the devaluation. However, this decision was retracted hours later.

Massa, who is also the Peronist presidential candidate, faces an uphill struggle to hold the economy together until October’s presidential and congressional votes. Massa, who is also Peronist’s presidential candidate, will have to fight to keep the economy together before the presidential and congressional elections in October.

Alberto Ramos is the chief Latin America economist for Goldman Sachs. He said, “This seems like a mission impossible.” It seems highly unlikely that Massa, or anyone else, will be able fix the economy within a short time period.

The imbalances in the economy are so great that we might have lost our ability to adjust. “Things will be chaotic.”

Massa must first secure the final approval of the IMF board for the latest $7.5bn installment to a $44bn bailout plan this month. The IMF had been pushing for a devaluation for months. The IMF’s biggest debtor Argentina is unlikely to be bailed out by the fund, so new money will likely come.

Massa had been resisting a devaluation despite increasing pressure on the currency rate for months. He has said he won’t repeat the exercise until after the election. Few believe that he can keep his promise. Inflation is the most pressing issue. Vitelli, an economist at Romano Group, predicts monthly inflation in August and September of 12-16%. According to some economists, this would push the annual rate to close to 180% by October. This could tip the economy into a hyperinflationary cycle.

The devaluation and increase in interest rates will not solve the problem, said Edwin Gutierrez of Abrdn. Abrdn owns Argentine dollar-denominated debt.

“It is like putting on a bunch o’ plasters to try and survive until the next set of elections. . . Every devaluation is accompanied by higher inflation, and the currency becomes less competitive.”

Milei has advocated radical solutions based on free markets, such as dollarising Argentina’s economy, shutting down the central bank, and cutting public spending. Milei’s narrow victory in the primaries – seen as a rehearsal for the October elections – has added uncertainty to already volatile markets.

Amilcar Colante, of the La Plata National University, said that “a lot will depend on what candidates say. In particular Milei.” If we have a Milei who is careful and explains his plans clearly, the economy won’t collapse. It will be different, however, if Milei or those around him, who aren’t very well-known, say things that cause more confusion in an already fragile market.

The result of the October election is still highly uncertain. The Argentine electorate is divided into three groups roughly equal in size: Milei’s supporters, the centre-right mainstream opposition, whose candidate Patricia Bullrich will be, and the incumbent Peronists.

A run-off seems inevitable in November, as no candidate is close to the required level for a victory in the first round. Massa insists that despite the Peronist vote having fallen to about half of its previous level at the last presidential elections in 2019, he still has the ability to win in a nation with a strong tradition on the left.

Martin Rapetti, director at Equilibra’s economics consultancy in Buenos Aires, said that Massa’s political skills will be an important factor over the next few months. “Even though his primary result wasn’t good, the triple tie puts him in the running to reach a run-off,” said Rapetti.