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What is a fiscal 'kick' and why does Argentina need it?

Presidential candidate Javier Milei speaks after his victory in a presidential runoff election in Buenos Aires, Argentina, Sunday, Nov. 19, 2023.
Presidential candidate Javier Milei speaks after his victory in a presidential runoff election in Buenos Aires, Argentina, Sunday, Nov. 19, 2023. Copyright Natacha Pisarenko/Copyright 2023 The AP. All rights reserved
Copyright Natacha Pisarenko/Copyright 2023 The AP. All rights reserved
By Doloresz Katanich with Reuters
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President Javier Milei has promised painful economic "shock therapy" in Argentina, where the inflation is almost 150%.

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Argentina's new president, Javier Milei, took office on Sunday and in his maiden speech warned that eradicating extremely high inflation and rescuing the nation’s troubled economy would come with a "shock therapy" programme.  

He is due to unveil the details of this "shock therapy" later this week, and while the public may not welcome the idea, the markets themselves are eager and hoping that the libertarian will give the economy a "firm kick" when he presents his plan, according to Reuters.

On Sunday, the outsider economist reaffirmed plans for tough spending cuts to address the country's worst economic crisis in two decades and to bring down inflation which is nearing 150%. He nonetheless 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 privatisations.

"It will be crucial for the new administration to quickly revive confidence," 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 consulting firm GMA Capital Research.

Milei will need to rebuild depleted central bank reserves analysts estimate to be net $10 billion (€9.3 billion) in the red, ease a looming recession, bring down the 40% poverty rate and revamp a failing $44 billion programme with the International Monetary Fund.

His first weeks may set the tone for his presidency.

"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 programme, Argentina may need to sharply weaken its exchange rate, currently around 365 pesos per dollar, which could see the price of dollars double.

"An FX adjustment seems inevitable," the investment bank said in a note released 7 December, 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."

Meanwhile, Argentina’s central bank announced on Monday morning that it is restricting access to dollars at the official exchange rate until President Milei’s administration announces the details of the promised shock therapy programme, according to Bloomberg. 

The country's Economy Minister Luis Caputo is expected to unveil the details of the plan on Tuesday.

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