Argentina, on the brink of economic collapse after shocking primary elections

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Buenos Aires, Argentina; August 13 2023 Vote for ultra-right-wing Argentine politician Javier Milei during the PASO elections

Argentina is under increasing pressure to devalue its currency once more as the government grapples with the challenge of averting an economic crisis in the lead-up to the October elections. This pressure stems from the unexpected primary victory of a far-right candidate, which led to an 18% devaluation of the peso. Consequently, the unofficial exchange rate, or black-market dollar rate, has nearly doubled compared to the new official rate. At this black-market rate, the largest peso banknote in circulation is now worth less than $3, compelling Argentinians to carry substantial quantities of cash. The official exchange rate, on the other hand, remains at 361 pesos per dollar.

In Argentina’s primary elections, voters expressed their discontent with the country’s two primary political forces, leading to a significant upset in the run-up to the presidential elections in October. With approximately 90% of the votes counted, Javier Milei, a far-right libertarian economist with a background in rock music, unexpectedly secured the top spot with 30.5% of the vote. These primary elections are compulsory for most adults, with each person casting one vote. They essentially serve as a rehearsal for the upcoming general election on October 22 and offer a clear indication of the frontrunner for the presidency.

Following the victory of Javier Milei, consumer prices surged overnight due to the government’s peso devaluation and a drastic increase in interest rates to 118% annually in a desperate attempt to restore economic confidence. This resulted in price hikes of over 20% on imported goods like laptops and electronics, as retailers adjusted to the peso’s decline.

In a sign of the government’s desperation, Argentina initially announced a two-week suspension of beef exports to curb domestic price increases following the devaluation, but later reversed this decision.

Before the primaries, Argentina’s economy was already in dire straits marked by inflation exceeding 100%, with approximately 40% of the population living in poverty, and a looming recession set its way. It appears to be a near-mission impossible to rectify the economy in a short timeframe.

The Government’s immediate challenge is to secure the final approval from the IMF board for the latest $7.5 billion instalment of a $44 billion bailout package. The devaluation on Monday may facilitate this, as the IMF had been advocating such a move for some time. Nevertheless, few believe that Argentina will be able to uphold its pledge not to devalue the peso again before the election. Economists now predict monthly inflation rates of 12-16% in August and September, potentially pushing the annual rate close to 180% by October and pushing the economy towards hyperinflation.

Milei has advocated radical free-market solutions, including dollarizing Argentina’s economy, closing the central bank, and slashing public spending. His narrow victory in the primaries, considered a rehearsal for October’s elections, has added further uncertainty to already nervous markets.

The outcome of October’s election remains highly uncertain, with the Argentine electorate divided into three roughly equal blocs. These include Milei’s supporters, those of the mainstream centre-right opposition represented by Patricia Bullrich, and the incumbent Peronists. A runoff in November seems likely since no candidate is close to the threshold for a first-round victory.

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