‘Shock therapy’: Argentines 54pc poorer as president devalues peso

Cuts to energy subsidies will save 0.5 per cent of GDP, while reductions to transport subsidies will save 0.2 per cent, according to the government’s estimates. The administration also expects reductions in social security and pensions to save an additional 0.4 per cent of GDP. The government plans to end indexation of pension payments, the official said.

The finance ministry also expects tax revenue to grow by 2.2 per cent next year.

Other measures announced including halving the number of ministries, cutting transfers to provinces and suspending public works. At the same time, Argentina will boost certain social welfare programs, Mr Caputo said.

The IMF praised the new government’s “bold initial actions” shortly after Mr Caputo’s announcement. “Their decisive implementation will help stabilise the economy and set the basis for more sustainable and private-sector led growth,” spokesperson Julie Kozack said in a statement.

Dramatic steps

The dramatic first steps follow a sombre inauguration speech on Sunday, when Mr Milei warned that Argentines will have to endure months of pain while he works to pull the country from the economic crisis inherited from his predecessor. Inflation is already running at more than 140 per cent annually, and prices are expected to jump between 20 per cent and 40 per cent in the months to come, the president said.

The government had closed Argentina’s export registry on Monday, a technical step that often foreshadows a currency devaluation or major policy change. The central bank also announced on Monday the official currency market would operate with limited transactions – a restriction it said it will lift on Wednesday.

The devaluation was long seen as inevitable.

In the run-up to Mr Milei’s inauguration, markets were signalling a currency drop of about 27 per cent in the first week of the new government, while investment banks like JPMorgan and local private advisory firms suggested it could weaken about 44 per cent. Grocers had already increased prices and banks were offering sharply weaker retail exchange rates hours before the Tuesday announcement.

Argentine authorities have for years slowed the peso’s decline in the official market through currency controls and import restrictions in an attempt to protect dwindling reserves.

That hodgepodge of capital controls has spurred at least a dozen exchange rates, hampering business and restricting investment in South America’s second-largest economy. On the campaign trail, Mr Milei pledged to scrap the currency altogether, replacing it with the US dollar.

“We’re always worse off because our response has been to attack the consequences but not the problem,” Mr Caputo said in his address. “What we’ve come to do is the opposite of what they always did, and that’s solve the root problem.”

On December 7, the prior administration had let the peso slip by about 5 per cent, while simultaneously limiting the amount of greenbacks banks could hold in order to prevent them from hoarding dollars.

The government had been burning reserves to keep the currency largely steady at 350 per dollar since the August primary vote, when Mr Milei’s surprise showing sent markets into a tailspin. In parallel markets, that rate is about 1000.

Since being spooked by his emergence in the August primary, investors have changed tack on the firebrand libertarian, cheering on his first steps as president-elect – namely, his decision to pick Wall Street veterans for some of the main cabinet positions while distancing himself from more radical proposals including dollarising the economy and shuttering the central bank.

As he begins his four-year term, the rally will be put to the test.

Mr Caputo previously served as finance chief in the administration of Mauricio Macri, when he negotiated a $US16.5 billion deal with holdout bondholders, allowing Argentina to return to international capital markets.

Amid a currency run in 2018, Mr Macri tapped him to take over at the central bank, but he only served for a few months before unexpectedly stepping down amid tensions with the IMF.

Bloomberg