Risks don’t disappear just because you ignore them. They only become more dangerous.
– Nassim Nicholas Taleb
At its core, economic policy represents the strategic management of risk. Every programme faces inherent tensions, and each stabilisation plan necessitates a set of decisions that favor specific objectives while sacrificing others. Every government determines the risks it will address head-on, those it will tolerate without intervention, and those it will overlook in the expectation that they will not come to fruition. President Javier Milei’s administration has made a decisive choice: addressing inflation is the primary risk to confront, and the comprehensive economic strategy has been designed with that objective in mind.
This methodology has yielded remarkable outcomes. In less than a year, inflation has decreased from monthly double-digit rates to below three percent, without the use of conventional measures like price freezes (though it did utilize exchange rate controls). Fiscal and monetary management has been stringent, characterized by a sustained primary surplus, real reductions in spending, and a Central Bank that has significantly curtailed its market interventions. Nonetheless, the presence of macroeconomic stability and declining inflation alone does not guarantee enduring sustainability. They are necessary, but not sufficient. The most significant risks are currently accumulating in the neglected sectors of the program. Failure to monitor and address these issues could jeopardize the progress that has been achieved to date.
1) Exchange rate misalignment: The implementation of the exchange rate as a nominal anchor has resulted in a notable real appreciation, a situation that remains unaddressed within the existing banded float and partial capital control framework established in April. This real appreciation has multiple adverse consequences: it diminishes the profitability of export sectors; promotes outbound tourism while undermining the competitiveness of inbound tourism; threatens the external surplus (with a significant current account deficit currently existing); and obstructs reserve accumulation at the Central Bank. It also raises concerns regarding Argentina’s capacity to manage its foreign-currency obligations and maintain its country risk rating at thresholds that impede access to sovereign debt markets under favorable conditions. Meanwhile, it fosters anticipations of a forthcoming nominal adjustment, exacerbating inflationary momentum and leading to a rise in dollar accumulation. In this context, the dollar has appreciated by over 5 percent thus far in July. Concurrently, there has been an uptick in trading volumes, prices, and Central Bank interventions within the futures market. While a portion of this volatility may be linked to the electoral calendar, the indicators are troubling, particularly in light of diminished reserve levels and the government’s dependence on external borrowing to restore them.
2) Fiscal risks: Although the government has successfully maintained a primary surplus, the prevailing disinflationary environment alters the situation significantly. As inflation subsides, the diminishing impact on consumer spending necessitates a more nuanced approach to expenditure management. During the initial five months of the year, it was only economic subsidies that experienced a notable decline in real terms. Simultaneously, there is increasing pressure to enhance the incomes of pensioners, public employees, and provincial governments. The sustainability of fiscal discipline hinges on the meticulous implementation of President Milei’s “chainsaw” strategy during the latter half of the year.
3) Monetary risks: While the situation remains manageable, it is imperative to acknowledge the emerging warning signs that warrant attention. The expansion of the monetary base and broad aggregates can be attributed to a rise in transactional demand, as well as the Treasury’s recent utilization of certain funds deposited at the Central Bank, subsequent to an accounting transfer of profits in April. While this situation may be transient and influenced by market dynamics (not all Treasury debt maturities were rolled over in the last auction), it nonetheless signifies a loosening that could undermine the monetary anchor if not managed with caution.
4) Political risks: The President’s confrontational strategy, which initially served to consolidate his support base, seems to be encountering diminishing returns. Congress has initiated a counteraction, moving forward with legislation that jeopardizes the financial sustainability of the programme. The opposition, along with some intermittent allies, appears to have recaptured the initiative within the Legislature, resulting in a diminished control of the legislative agenda by the government. This introduces uncertainty regarding the enactment of essential reforms and heightens the potential for legislation that carries significant fiscal or symbolic implications.
5) Social risks: The earlier recovery in real wages has been undone. Rising tariffs and essential services such as electricity, gas, transport, and private healthcare have exceeded the rate of average inflation, thereby constraining disposable incomes for a significant portion of the population. Although the optimization of social programs and the real-terms increase in the Asignación Universal por Hijo (universal child allowance, AUH) benefit payments have offered some relief, they are not a sustainable substitute for overall wage enhancements in the long run. The interplay between political and social risks is significant: ongoing parliamentary tensions coupled with increasing social unrest will constrict the capacity to implement structural reforms.
An unavoidable question arises regarding whether the risks identified in this article could instigate a disruptive correction in the exchange rate, inflation, or financial system, or if a more gradual scenario is more probable. This would entail a process of cumulative wear and tear that necessitates a partial reconfiguration of the programme without a singular shock event. Argentina’s economic history illustrates instances of both phenomena. In periods of significant currency appreciation, the most pressing concern often pertains to the sustainability of the external sector: if the exchange rate remains unadjusted and reserves are not replenished, a sudden surge in the dollar could serve as a catalyst for broader destabilization – particularly if it aligns with political unrest or social upheaval.
However, there exists a more plausible – and potentially more insidious – scenario in which no individual risk escalates uncontrollably, yet all gradually deteriorate. Weak investment, stagnant wages, social fatigue, loss of political control over Congress, failure to build reserves, and rising dollar demand may not appear pressing individually; however, collectively, they erode the sustainability of the government’s programme. What starts as a positive attribute (fiscal discipline, declining inflation) may turn into a disadvantage if it is not paired with reforms and adjustments that tackle the fundamental imbalances.