Javier Milei finally lugs key reforms through Argentina’s Senate

Author: Editors Desk Source: The Economist
June 14, 2024 at 06:37
Photograph: Reuters
Photograph: Reuters

Markets celebrated the two bills’ passing, after protesters took to the streets of Buenos Aires

Outside argentina’s Senate on June 12th riot police manned barricades as protesters surged forward. Some screamed at the police to take off their helmets and join them. One lawmaker staggered away after taking a blast of pepper spray to the face. Soon protesters were hurling Molotov cocktails. A journalist’s car was set alight. The government, prone to hyperbole, called the protests an attempted “coup”. Inside the Senate things were nearly as tense. Some senators demanded the session stop due to the violence outside but were slapped down. Insults flew. “Mentally ill” was the term Cristina López, an opposition senator, used to describe President Javier Milei; the combative libertarian economist, who recently shrieked out a set of rock songs to a packed stadium, calls himself “one of the two most important leaders in the world.” He has not named the other.

The chaos was prompted by voting on two reform bills with which Mr Milei hopes to turn around Argentina’s flailing economy. One delegates emergency powers to the president, privatises several state-owned firms and creates big incentives for would-be foreign investors (among much else). The other aims to raise desperately needed tax revenue. After more than 20 hours of deliberation which ran overnight the Senate passed them both. The vote on the first was so tight the vice-president had to break the tie. In the second the reinstatement of income tax, eliminated last year by the previous government in an effort to cling to power, was knocked back. The government celebrated wildly nonetheless. Mr Milei tweeted his catchphrase, “VIVA LA LIBERTAD CARAJO”, roughly “LONG LIVE FUCKING FREEDOM.”

Upon taking office in December, Mr Milei inherited a state that had spent beyond its means for years, printing money to fill the gap. Inflation was soaring, foreign reserves empty. Mr Milei rose to power by blaming the “caste”, Argentina’s political establishment and unions, for the mess. He immediately slashed spending and allowed inflation to chomp away at the real value of pensions and salaries. This has yielded a string of monthly fiscal surpluses—almost unheard of in Argentina. With the money printer unplugged, inflation is expected to have fallen to the (still-high) rate of 5% per month in May. Markets rejoiced. The cost has been a deep recession. Mr Milei’s backers worried that a lack of congressional support would make it hard to pass laws required for continued economic reform. The first attempt at that, a whopping 664 article reform bill, failed in Congress in February. After a torturous, months-long battle, his second attempt has passed with some 400 fewer articles.

It is Mr Milei’s first real legislative victory. Markets celebrated in early trading on Thursday. The imf, which has extended huge loans to Argentina, is surely delighted. Strikingly, some investors who pump in more than $200m will get a slew of tax benefits, and be exempt from most of Argentina’s labyrinthine currency controls for the next 30 years. The law puts significantly more influence in Mr Milei’s hands, giving him emergency power over matters administrative, economic, financial and energy for one year. Private investors will be allowed to buy the equity of some state-owned companies. A tax amnesty was put in place to lure money back into the formal financial system.

The government made heavy concessions to get the bills over the line. The most significant hit was the portion of the law that would have reinstated personal-income taxes, which was voted down. That will make balancing the books harder. The government had wanted to privatise about 40 companies. It only managed two. Among those spared at the last minute was Aerolíneas Argentinas, the country’s loss-making flag carrier.

Federico Sturzenegger, who Mr Milei recently made a government minister, is delighted with much of the bill. He says the worst loss was of an article designed to end the practice of unions taking “solidarity fees” from the wages of non-union members without their consent. “For Argentina to become a rich country you have to win the battle with the caste,” he says, “and that article would have helped a lot.”

The lower chamber must now vote on a version of the bill that reconciles the law it has already passed with the Senate’s version. The government hopes this process will allow it to reintroduce some of the articles that were lost in the Senate, and especially to reinstate income taxes.

Many investors see the bill’s passage as a positive signal of Mr Milei’s ability to govern through further deals. But it is more complicated than that. The fear that Mr Milei, who has called Congress a “nest of rats”, would be too intransigent to compromise has been laid to rest. But after giving him one win and with midterm elections looming next year, lawmakers will be able to claim that they have given him enough. “It’s going to be more and more complicated,” says Luis Juez, a senator who backs Mr Milei’s reforms. Complications are already arising. Last week the lower house passed a pension formula that would cost almost 0.5% of gdp this year. A raging Mr Milei promised to veto it, but if both houses back the reform with a majority of two-thirds, a real possibility, his veto would be overridden.

Popularity is Mr Milei’s best remedy for waxing congressional stubbornness. His approval rating remains well above 50%. That is remarkable given the deep economic pain in Argentina. The key ingredients seem to be his constant castigation of the caste—while the Senate debated he labelled the governor of the province of Buenos Aires a “communist dwarf”—and his success in pulling down inflation.

It is not clear how long Mr Milei’s unusual recipe for popularity will remain potent. Voters are increasingly worried about the recession, which is getting worse. Construction activity was down 37% year-on-year in April. Industrial output fell 17%. Analysts expect rising salaries and the end of energy-price controls to push inflation back up in June. Mr Milei constantly says a V-shaped recovery is just around the corner. He needs it to materialise without inflation surging.

The government hopes the reforms will lure investors and boost growth. But much of the broader macroeconomic mess remains. A deal made this week with China to rollover about $5bn in debt repayments provides breathing room, but Argentina still has heavy capital controls which make it difficult for investors to get money out of the country. The peso now looks overvalued and is becoming more so, hurting exporters and raising the prospect of a devaluation and more inflation. Most gravely, the government remains unclear about its long-term plan for monetary policy and the exchange rate. Without good answers to these questions, and clear action, Mr Milei’s strong recovery remains a distant prospect.

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