The slump and the spiral
Javier Milei is in serious trouble
Argentina’s president claims he is the true victim of a struggling economy
Photograph: Reuters“Do you know who has been hit hardest in this economy in real terms?
Me,” declared Javier Milei of Argentina at a recent swanky event.
“I’m the only one whose salary hasn’t changed since I took office,” he said, while arguing that his cuts have fallen on the political class.
“I’m the lowest-paid president in the Americas.”
That message is unlikely to win over struggling Argentines.
Indeed, Mr Milei’s net approval rating has plunged recently.
It is now almost minus 30, the worst since he took office in December 2023 (see chart).
Mr Milei’s party won legislative midterms last October.
That endorsement of his radical cost-cutting and liberalising agenda allowed him to get a slew of reforms through Congress.
Yet voters now have two big gripes: corruption scandals and a struggling economy.
In his first two years in office his policies cut monthly inflation to 1.5%, about a tenth of its previous level, but it has since been creeping up.
The economy shrank sharply in February.
Mr Milei does not face re-election until October 2027 and an energy boom could help him, but he needs to get a grip.
Start with the scandals.
In February last year Mr Milei posted on social media in support of $LIBRA, a cryptocurrency.
It soared in value before quickly plunging, wiping out some $250m for many holders, except a few big ones who sold at the peak.
Mr Milei quickly said that he “obviously” had no connection with the $LIBRA venture.
Yet phone records recently obtained by federal investigators show that on the night of Mr Milei’s post there were seven calls between Mr Milei and one of the businessmen behind it.
Investigators found draft documents on the phone of one of the crypto businessmen outlining potential financial agreements between them and Mr Milei.
They specify three payments totalling $5m, including one for publicly naming one of the entrepreneurs as an adviser.
It is unclear who the payments were intended for; there is no evidence that Mr Milei agreed to or received them.
Prosecutors have named him as a person of interest in the case, but he has not been charged.
All those involved deny any wrongdoing.
Argentines appear even more annoyed by a scandal involving Mr Milei’s chief of staff, Manuel Adorni.
Federal prosecutors are investigating him for alleged illicit enrichment, after reports of lavish travel, including a trip to Aruba paid in cash, despite a modest public salary.
Prosecutors are also looking into a family trip on a private jet to a Uruguayan resort and the purchase of an apartment at a surprisingly low price with a curious interest-free loan.
Mr Adorni denies wrongdoing.
Mr Milei has backed him and lashed out at journalists.
Over four days in April, for example, he published 86 posts on X attacking the press, and reposted 874 more.
He often repeats a catchphrase of American right-wingers: “We don’t hate journalists enough.”
In mid-April his government blocked reporters from entering the Casa Rosada, the seat of the presidency, after a few of them allegedly filmed without authorisation.
(The journalists say they had notified the authorities.)
He called the media “filthy scum” and reposted an AI-generated image of one of the journalists in prison garb.
On May 4th journalists were permitted to return, but under tight new rules.
Argentines might have ignored corruption allegations if the economy were humming.
It is not.
Official data suggest gdp in February fell by 2.6% from January, the largest drop since 2023.
Manufacturing and retail activity plunged.
This is leading to shrinking tax revenues, which threaten Mr Milei’s impressive fiscal surplus.
Squeezed, the government is delaying payments to some suppliers to public bodies.
Oil, mining and agriculture are still booming.
Mr Milei says those sectors, together with technology, are the future of the economy.
Yet they require relatively few workers, together accounting for just 12% of employment.
Manufacturing and retail, as well as construction, are more labour-intensive and account for far more of GDP.
Their shrinkage has led to the loss of hundreds of thousands of salaried jobs since Mr Milei took office.
Surveys show that low wages and unemployment are now Argentines’ biggest worries.
And so far they are made worse by Mr Milei’s policies.
He has ripped away protections and exposed local manufacturing firms to foreign competition.
That may be wise, but the transition hurts.
He has prioritised reducing inflation over promoting growth.
That has meant tight money supply and high interest rates, which hurt business.
Loans to the private sector in pesos have been stagnant since August.
Mr Milei has also relied on a strong peso in his fight against inflation.
It now floats within wide bands and has been strengthening for much of this year.
That is in part because of high interest rates, which attract cash temporarily into pesos.
Strong oil production and fast-growing exports mean that the high prices caused by the war in Iran have bolstered the currency.
But a strong peso hurts manufacturing by making rival imports cheaper.
It also hurts construction.
Developers pay workers in pesos but sell homes in dollars, so a strong peso squeezes their margins.
Construction remains in a deep slump.
Worst of all, even high interest rates and a punchy peso have recently not been enough to pull down inflation.
Monthly inflation has been rising for ten months, hitting 3.4% in March, some 33% year-on-year.
This is partly inertia and partly because the government lacks clear, predictable monetary policy to anchor inflation.
Mr Milei has also been cutting energy subsidies and in March the oil shock hurt, too.
The cost of beef, an Argentine favourite, has soared amid a global crunch.
Some of this should soon ease and inflation may fall a little, says Santiago Bulat of Invecq, an Argentine consultancy, but other price pressures may grow.
The government finally seems to be prioritising growth by allowing lower interest rates.
The risk is that the peso weakens and inflation remains high as a result.
Mr Milei’s credibility is eroding.
In March he said that monthly inflation would be less than 1% by August.
That looks near impossible.
It is not all gloom.
Growth may soon improve: analysts still expect it to top 3% this year.
The big hopes are booming oil extraction and international investment in gas and mining.
Their expansion would boost exports further.
The government has also been buying foreign reserves, addressing a long-standing weakness.
It is using most of them to pay debt, however.
It needs financing in dollars so it can roll over the foreign debt due next year while simultaneously piling up reserves.
To that end, it is working on a deal to borrow $2bn from commercial banks, backed by guarantees from the World Bank.
The stakes are extreme.
The good news for Mr Milei is that as his approval rating falls, no rival’s rises notably.
Argentina’s fragile equilibrium is the big challenge.
The populist Peronists’ record of economic mismanagement is stark; as elections approach a bad poll for Mr Milei could panic markets.
The ensuing instability can lead to worse polling, setting off a damaging spiral.
Investors already demand a higher premium to remain exposed to Argentine bonds beyond Mr Milei’s current term.
To avoid spirals, he may need to be on track to win comfortably.
Growth, jobs and falling inflation would be a big help.
He has no time to lose.
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