In a recent blog post titled “The Challenges of the Argentine Economic Transition,” Domingo Cavallo analyzed the economic situation under Javier Milei’s presidency. He examined financial indicators and expressed skepticism about the possibility of a significant reduction in inflation occurring soon. Additionally, Cavallo noted that the country had entered a deep recession and the challenges of trying to exit the exchange market mid-year.
In his analysis, Cavallo pointed out that while there were some favorable indicators such as a reduction in the exchange gap, these may not lead to a significant decline in inflation rates. He highlighted the inertia in price behavior, citing that real salaries and pensions have already reached their minimum levels and must increase monthly at rates no lower than the previous month’s inflation rate. Furthermore, he mentioned the dramatic decline in economic activity, particularly in the construction sector, which signals a deep recession.
When discussing potential for exchange reunification, Cavallo emphasized paying attention to various factors like the real exchange rate, dollar deposits in the banking system, and channeling of dollars into the local capital market. He cautioned against rushing to remove stocks from the middle of the year and recommended adjusting devaluation closer to inflation rates while splitting the exchange market to create a truly free market without interventions from central authorities.
Cavallo reiterated that achieving macroeconomic stability is crucial for a successful transition towards a more open economy. He emphasized that hasty reunification and liberalization could lead to failure and urged caution when making decisions regarding Argentina’s economic future.
