Milei Eases Cash Crunch to Reignite Economic Growth in Argentina

Argentina's President Javier Milei's administration is gradually shifting its economic priorities from solely targeting inflation to a more balanced approach, as growth, job creation, and his own approval ratings remain stagnant. The Central Bank permitted the local currency to depreciate over the past three months, while the Treasury increased liquidity in the economy.

This move comes as various indicators suggest that patience is wearing thin among citizens after more than two years of stringent austerity measures. Milei, who has achieved reducing inflation as his chief accomplishment, is now opting for a less rigid stance against inflation in an effort to improve voter perceptions of the economy.

The monetary base, which refers to the amount of cash in circulation, increased by an average of 5.4% in July compared to June, outpacing inflation growth. This change was primarily driven by a reduction in Treasury deposits at the Central Bank, reversing a period of slow monetary base growth that had been below or matching inflation.

The peso has weakened by 9.1% against the dollar since mid-April, the most significant decline among emerging markets. This depreciation follows a pattern where Argentina's currency has lagged behind inflation throughout much of Milei's first two years in office. Milei's initial focus was on slashing inflation through spending cuts, currency controls, higher interest rates, and curbing money printing, which succeeded in slowing annual consumer price gains to 34% from a peak of 289% just two years prior.

However, the Argentine economy is now grappling with job losses, slowing growth, and Milei's approval rating hovering near its lowest levels since his presidency began, roughly a year away from the next election. In light of these challenges, policymakers are considering injecting more pesos into the economy to stimulate growth while preventing sharp increases in short-term interest rates that occurred last year.

Central Bank Governor Santiago Bausili stated last week that conditions are favorable to resume remonetization of the economy, as household and corporate demand for larger peso balances is evident. The Central Bank also decided not to deposit additional earnings from a recent local debt auction at the Central Bank; instead, the 3.8 trillion pesos (US$2.5 billion) was distributed among commercial banks to curb a spike in short-term interest rates.

Some economists argue that this strategy aims to inject liquidity into a stagnant economy where lending has slowed, and consumer spending remains weak due to wages lagging behind inflation. However, there are concerns that this monetary expansion could either reignite inflation or prompt Argentines to convert extra pesos into dollars before the 2027 election.

Juan Manuel Pazos, chief economist at local broker One618, expressed skepticism about the need for increased money supply, suggesting that it may not be justified by stronger money demand. He believes the government is loosening monetary policy at a time when the official foreign exchange market's seasonality is becoming less advantageous and as the election cycle approaches.

Even Milei's most ardent supporters acknowledge the necessity for a more balanced approach heading into the election cycle, moving beyond just looser monetary policy. Argentina's GDP is expected to have contracted in the second quarter, according to the Central Bank's latest survey of market analysts, representing a sharp downward revision.

The economy has lost 28,000 private-sector jobs, and multiple polls in July indicated a decline in Milei's approval rating. Economist Ricardo Arriazu has previously supported Milei but cautioned in late July that opening Argentina to more foreign trade could lead to "pockets of unemployment and poverty," arguing that the government should identify and support sectors and workers that may need assistance during the transition.

Other business leaders, such as Martín Rappallini, head of the Argentine Industrial Union, and Roberto Méndez, CEO of tire retailer Neumen, have called for tax incentives, subsidized credit, and even some protection from imports to bolster industry and revitalize lending. While Milei and his ministers contend that workers laid off from less competitive industries like manufacturing will transition to thriving sectors like energy, agriculture, and mining, Arriazu remains unconvinced that this transition will be smooth.

He warns that in similar situations, people either do not relocate or take an extended period to do so, suggesting that certain regions, particularly Greater Buenos Aires, where most voters reside, might bear the brunt of Milei's trade policies.