The Milei administration recently announced that in January it achieved a monthly budget surplus, Argentina’s first in almost 12 years. For President Javier Milei and Economy Minister Luis Caputo, this demonstrates the administration can deliver on its promise to cut spending to tame inflation, strengthen the peso and eventually lift forex market restrictions imposed over five years ago.
This is good news for the government after a major setback in Congress earlier this month. The bad news is a severe recession is already showing in the official data.
On the one hand, the fiscal surplus gives the administration a burst of political oxygen after choking on Milei’s mega-reform package, which Congress killed on 7 February amid a feud with provincial governors. Prior to that, Caputo had already withdrawn the fiscal chapter of the bill, which included an increase in export duties that raised eyebrows among governors and the “friendly” centrist opposition.
On the other hand, the good fiscal news was not the result of structural reforms but rather the government’s decision to freeze spending amid rampant inflation. As the president did not send a 2024 Budget Bill to Congress after taking office on 10 December, his administration is by law entitled to repeat the 2023 budget. Yet, given that annual inflation stood at 254% in January, spending the same nominal amount meant a sharp reduction in real terms.
Milei is also celebrating another aspect of his macro policy: forex accumulation. Since he took charge of the government, the Central Bank has purchased almost $8bn in the forex market. If that trend continues, Milei could hope to lift forex restrictions by mid-year, something the IMF has requested him to do.
Still, the flip side of this is the rapid deterioration of real wages and a looming recession — both of which are dragging down the government’s approval ratings.
According to a respected study by the Argentine Catholic University, the population living in poverty jumped almost 10 percentage points to 57.4% in January. Meanwhile,
Milei’s approval rating has fallen around 10 percentage points since he took office, although 45% of Argentines still support him.
The Milei administration is walking a tightrope between meeting its ambitious fiscal targets and the social impact on wages and employment. While the public seems to accept the idea that a certain level of adjustment is necessary, the government needs to show inflation on a consistent downward trend by Q2 to show light at the end of the tunnel.
If it doesn’t, the president’s approval will take a big hit — and further curtail his capacity to advance his reform agenda.
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