Although markets are anticipating that new Argentine President Javier Milei, a libertarian, will give the economy a "firm kick" when he unveils his plan this week, voters may have reason to be concerned about his promise of painful economic shock therapy.
On Sunday, the outsider economist reaffirmed plans for tough spending cuts to address the country's worst economic crisis in two decades and bring down inflation nearing 150%, though warned the situation would get worse before getting better.
"There is no money," he said repeatedly in his maiden speech, pledging to make tough decisions even if that means pain for the country. "The challenge we have ahead is titanic."
Analysts said that Milei, who won over voters with a "chainsaw" economic plan to cut state spending and overturn a deep deficit, needed to follow through on this tough talk. His election win has buoyed stocks and bonds in recent weeks.
"The biggest risk in the coming days is that the signals are not strong enough," said consultancy EcoGo in a note. "The signals should include a firm fiscal kick and a clear signal of willingness to carry out structural reforms."
Milei and economy chief Luis Caputo are expected to announce a package of economic measures early this week, with investors looking out for a devaluation of the peso, now held by currency controls, public spending cuts and potential privatizations.
"It will be crucial for the new administration to revive confidence quickly," said economist Gustavo Ber, adding that the government needed social and legislative support given the likely economic pain ahead and inflation spiking further.
"The macroeconomic picture ... is.. to say the least, terrifying. Although inflation has already hit its highest in the last thirty years, everything indicates that the worst is yet to come," said the consulting firm GMA Capital Research.
Milei will need to rebuild depleted central bank reserves analysts estimate to be net $10 billion in the red, ease a looming recession, bring down 40% poverty rate and revamp a failing $44 billion program with the International Monetary Fund (IMF).
His first weeks may set the tone.
"To get out of this situation, it will be necessary for the new government to act quickly and eliminate capital controls as soon as possible," said Lautaro Moschet, economist at the Freedom and Progress Foundation.
Morgan Stanley said in a report that without a strong economic program, Argentina may need to sharply weaken its exchange rate, currently around 365 per dollar, which could see the price of greenbacks double.
"An FX adjustment seems inevitable," the investment bank said in the Dec. 7 note, adding that it could weaken to 700 per dollar. "An economy with no credible economic program may need to compensate with a weaker FX to attract investment."
