#5 | 2025: Navigating Argentina's macroeconomic crossroads

ACHIEVEMENTS: CURBING INFLATION AND CUTTING PUBLIC SPENDING

By the end of 2024 the administration of President Milei was able to control the rampant inflation that Argentina suffered throughout 2023. According to the INDEC (National Institute of Statistics and Census) by December 2024 the monthly inflation rate was 2.7%, with an annual rate of 117.8%. This varies greatly with the inflation rate of the beginning of 2024: 20.6% by January 2024 according to the INDEC.

Data published by the Institute of Statistics and Census

THE THREE MAIN ANCHORS OF PRESIDENT MILEI’S ADMINISTRATION

Under President Milei, the federal government of Argentina implemented measures to stop overspending and control inflation based in three anchors: an inflationary anchor (the official exchange rate of the dollar was "anchored” devaluing the Argentine peso at a rate of 2% per month); a fiscal anchor (reducing public spending dramatically: infrastructure projects were scrapped while public salaries were held down); and a monetary anchor (halting the issuance of money to finance the Treasury).

Between December 2023 and October 2024 the Argentine peso appreciated 40% in real terms (adjusted for inflation) according to the BIS (Bank of International Settlements). This provoked the increasing price of goods and services in dollar terms. However, the purchasing power of Argentinians remains still, with unchanged salaries and a decreasing consumption mainly explained by the recession of the economy. By Q3 2024, the Argentine economy shrinked by 2.6% , the sixth straight decline.

In addition to controlling the inflation rate and cutting overspending, Milei’s measures also slowed economic activity. According to the INDEC, in Q3 2024 jobs were down 0.3% from a year ago. A contraction in the GDP, rising unemployment, households tightening their budgets, a decline in production and manufacturing, and a decline in business investment (such as equipment and infrastructure) are all characteristics of an economic recession.

Moreover, because Argentina is now expensive in dollar terms, it is also more expensive to produce goods, which makes the Argentine industrial and agriculture sectors less competitive. The government also opened food imports in March 2024, in order to curb prices hike, all of which can be of concern for the local industry.

While the poverty indicator skyrocketed to 52.9%, in the first half of 2024 (the highest level in the last twenty years), according to the UTDT University (Universidad Torcuato Di Tella) poverty decreased in the second half of 2024 to 36.8%. This figure is not definitive, because it is based on the calculations of the UTDT University. The definitive poverty rate will be issued by the INDEC in March 2025.

WHY DO MACROECONOMIC CONDITIONS MATTER?

According to a report of the World Bank from October 2024, both fiscal balance and inflation are key obstacles that need to be tackled in order to overcome the persistence of poverty in the country. Other factors, such as labor informality, generational and regional inequality, and the impact of climate change; were also identified by the World Bank as obstacles to overcome poverty and income inequality in Argentina.

According to the Governance Indicators published by the World Bank, Argentina enhanced its performance in 2023 around three indicators: Control of corruption, Rule of Law, and Regulatory Quality. At the same time, the Governance Indicators also showed a poorer performance in two indexes: Political stability and absence of violence/Terrorism; and Government effectiveness. Meanwhile, the indicator of Voice and Accountability performance remained stable, as the highest percentile achieved by the country in both years (63rd percentile). Overall, by 2023 Argentina still has 3 out of 6 indicators below the 40th percentile.

*Table elaborated by the author based on the data from the World Bank

After winning the presidency, the Administration of President Milei made efforts to foster long-term predictability as well as a business friendly environment. In addition to the enactment of the Bases Bill (Ley de Bases), the government also made some efforts to attract investments to the country by issuing regulations to benefit specific industry segments, offering tax, foreign exchange, and custom benefits (such as the Incentive Regime for Large Investments - RIGI). Moreover, by January 2025, Moody’s raised Argentina’s credit rating, from “Ca” to “Caa3”.

However, and despite the government attempting to attract investments to the country, the macroeconomic conditions remain as a fundamental issue for investment in a relatively weak country alongside with other potential risks, such the presence of organized crime in the region. Additionally, Argentina needs not only to grow, but also to generate quality employment. These two elements are essential to create conditions for the population to prevail over poverty.