Milei’s Success in Argentina Isn’t Threatened by $7 Big Macs

(Bloomberg Opinion) — Order a Big Mac in Buenos Aires and you’ll have to pay about $7 — among the world’s most expensive price-tags for the popular burger(1).

It’s a consequence of Javier Milei’s “shock therapy” plan, which in his first year as Argentina’s president led to a sharp slowdown in inflation and a quick appreciation of the real exchange rate (that is, adjusted by price gains.) Thanks to a draconian fiscal adjustment, slow crawling peg of the currency and a tight monetary policy that put a lid on peso printing, the monthly inflation rate dropped to 2.4% in November from 25.5% in December 2023, when Milei took office. Remarkable.

Yet the resulting peso strength has some economists worried. Argentina’s history for most of the past century has been a loop of booms followed by inevitable busts: A few good years when the peso tended to appreciate by capital inflows would give way to a loss of competitiveness, manufacturing layoffs and a widening current account deficit. Capital flows would reverse once investors lost confidence in the country’s capacity to finance those imbalances, in turn prompting a sharp depreciation of the currency, more inflation and political instability — game over for any government.Some fear Argentina is repeating the story once again under Milei: “The Peso is way overvalued anyway and needs to fall,” Brookings Institution’s Robin Brooks posted on X last week, arguing for months that Argentina needed to devalue its currency. “Maybe there’s a new government, but it’s making the same mistake as all the past governments. This will end in tears,” he also wrote in June.

True, Argentina is much more expensive: Although I left two decades ago, I’ve been regularly visiting the city I was born in; this time, I can’t think of a costlier moment when making the conversion into US dollars. I am probably spending double the greenbacks I spent a year ago. Brazilian beaches and Chilean malls are ready to greet hordes of Argentines this holiday season. The situation is made worse by the 22% collapse of the Brazilian real in 2024 amid a brewing fiscal crisis in Argentina’s main trading partner (what a reversal of fortunes!).

But despite all that, it’s wrong to assume these are definite signs of economic trouble ahead.

First, because any successful stabilization plan would have necessarily led to an appreciation of the exchange rate. The oddity isn’t that Argentina has now some goods priced as if it was Mexico or even the US (clothes and technology are ridiculously expensive here); the real oddity was that until recently you could have a great steak with wine for lunch at the Four Season in Buenos Aires and pay $25. Those glorious days — for international tourists — are long gone and the gap between the parallel and the official exchange rates, which was almost 200% right after Milei’s election, is now about 10%. And most of this was achieved without the hot money inflows of previous programs.

Secondly, the FX is only one item in the cost structure of companies. As BlackTORO Global Investments’ chief economist Fernando Marengo points out, the economy’s competitiveness depends on the real exchange rate — which, unlike the nominal exchange rate, the government can’t control — and under that measure Argentina is currently at around its long-term average.

“This exchange rate, with a prudent macroeconomic approach that includes not printing more pesos than what’s demanded, could be sustained for years,” Marengo told me.

There are reasons to argue that this time it really may be different for Argentina: The government is ending 2024 with an expected primary fiscal surplus of 1.5% of GDP, which was unthinkable 12 months ago. For next year, economists at Banco BTG Pactual SA see a positive result in the budget balance subtracting interest payments of 1.3% while the current account deficit — the usual warning of any FX problem — would be a very manageable 0.6% of GDP. The economy emerged from a long recession in the third quarter, growing faster than estimates, and it’s projected to expand by 5% next year.

“The peril of having an overvalued currency is building deficits that become hard to finance in case of a sudden stop,” the analysts wrote in a research note. “Argentina will always have the chance of adjusting the currency if that is the case, but that is not something that looks likely in 2025 or even in 2026.”

More importantly, this is the first time in the many stabilization programs undertaken by Argentina where there is both political will and social consensus supporting budget cuts. The previous attempts to put the government’s accounts in order all ended once politicians changed their minds or the electorate lost patience with austerity. There is no question that Milei has delivered on his shock therapy pledges; The novelty here is that voters seem supportive of this sour remedy — at least for now.

Some Argentina-watchers ignore that what makes the country a rara avis in global economic policymaking is its bi-monetarism. Argentines use the peso for day-to-day transactions and the dollar for what they most care about: investments and savings; devaluing the currency now, as Brooks suggests, will only reaccelerate inflation, killing the current rebound in activity, and hurting Milei’s political project almost irreversibly.

Achieving the challenging part — macroeconomic and financial stability, with low inflation and activity growth — is what Argentine firms and families need to thrive. Also key is slashing regulations and tax distortions to prompt more competition, corporate restructuring and less state intervention, a microeconomic aspect of Milei’s program that often doesn’t receive enough attention. The exchange rate is a consequence of all these variables, and not the other way around; an artificially weakened peso that seeks to bypass these reforms will be doomed to failure. Likewise, letting the peso float freely now with net international reserves still on negative levels would be not just risky but suicidal. It’s what President Mauricio Macri tried in 2015 — and that, indeed, ended in tears.

Don’t get me wrong, Milei’s experiment could still fail: Continuing fiscal surpluses may be impossible given renewed political and social pressures; the central bank could be forced to abandon its monetary prudence; the international outlook may become much gloomier; next year’s GDP recovery may fall short of expectations; politics could turn on the combustive president; exiting capital controls may spark volatility. At the end of the day, this is Argentina: yesterday’s performance is no guarantee that tomorrow’s results will be different. History’s odds are against Milei. But as things stand now, there is no reason to believe the country is heading to a new exchange rate crisis.

Argentina will be able to have a normal free-floating exchange rate, as modern economies do, the day the peso swings aren’t on the cover of every newspaper and talk shows. That requires decades of discipline but it’s doable — most Latin American nations achieved it this century.

For the moment, the country just needs to focus on fixing the underlying conditions that stand in the way of a new, and saner, normal.