Wednesday, September 18, 2024

AS/COA Insider: Juan Cruz Díaz on Javier Milei's 2025 Budget Proposal

“There's a sense of cautious optimism,” says the AS/COA senior advisor about the Argentine president’s plan to further fiscal discipline.

On September 15, President Javier Milei of Argentina presented his 2025 budget to Congress, pledging austerity and fiscal discipline. Milei, who took office in December 2024, will now have to negotiate with the opposition-led Congress to pass his proposal.

“The president is presenting a new methodology to budgeting that ensures fiscal balance,” says Juan Cruz Díaz, managing director at Cefeidas Group and senior advisor at AS/COA. He explains the content of Milei's proposed budget, his evolving relationship with Congress, and the response of Argentines and investors.

To speak with an expert on this topic, please contact mediarelations@as-coa.org.

AS/COA Online: Javier Milei presented his budget to Congress last Sunday, September 15. How was this different from other budget presentations from previous governments?

Juan Cruz Díaz: This was the first time that a president went directly to Congress to present the budget proposal in this way. It was with a whole scenography of a presidential speech—only comparable to our opening of the congressional activity in March.

It was a big deal in terms of politics. He leveraged a national TV chain, so the speech was on every single TV channel in Argentina. It was much more of a political speech than it was focused on the actual details of the budget. It was basically the president presenting his position, his approach, his ideas, and his political view behind the budget. Still, we did get little details on the budget itself, which was actually sent to the public after the speech.

AS/COA Online: What is in President Javier Milei's 2025 budget? What are areas are going to be most affected and what will remain unchanged?

Díaz: I think the most salient element is the president is presenting a new methodology to budgeting that ensures fiscal balance. He changed the traditional budgeting strategy that the governments have had forever, which is defining expenditures that the government will make and then finding the financing for those expenditures.

Instead, he will focus first on what the available funding actually is and, depending on this, will then allocate the expenditures. This way ensures that the government is not spending more than it actually has. He's focusing on savings.

This approach has implied a lot of budget cuts this year that would hit several sectors hard. Universities would get a lot of cuts. That's part of the discussion right now because Congress this week passed a university funding bill that the president is threatening to veto. Of course, the pensions are getting a big hit. Having said that, the government has prioritized this year some spending on social programs that help the poorest citizens. On the other hand, we are seeing spending increases in the intelligence agency. In that sense, it's mixed.

But I think the most important element here is that the government, with this budget, is expecting a very optimistic performance of the economy. They're expecting 5 percent growth for next year, after an almost 4 percent fall in GDP this year. They're expecting just a little bit over 18 percent inflation next year. That means that inflation per month will be around 1 percent versus the 4.2 we are having right now. That's extremely optimistic, even by the central bank's calculations. Further, they're extremely optimistic about keeping the fiscal surplus that they’ve managing to have in the last few months.

The government's expectation it that if some of these economic predictions become true next year, that means that the economy will get better and fiscal discipline will pay off with warmer relations with investors and with credit ratings agencies. If the sovereign rating of Argentina improves, the financing of the private sector will be cheaper. And that means that the private sector will invest more and that will create more jobs and growth.

AS/COA Insider: Juan Cruz Díaz on Javier Milei's Legislative Win

"It was a very important moment in the president’s tenure,” says the AS/COA senior advisor, who covers the Argentine leader's first six months in office.

AS/COA Online: Do you get the sense that Argentines are on board with his plan to lower inflation?

Díaz: Lowering inflation is the number one mandate that President Milei has from his election. As soon as he took office in December, there was a big devaluation that put inflation in Argentina at 25 percent. We're seeing a process in which inflation has been decreasing in the last few months, hovering around 4 percent. It's a surprise for a lot of people and I would say that it's President Milei's biggest achievement so far.

I have to say the costs of that have been quite high if you look at the rates of poverty and extreme poverty, unemployment, and economic activity.

Having said that, Argentine society has shown an impressive amount of patience because they understand that the economic situation is not President Milei’s fault. At some point, I think the demands of the society will be higher on the president. The government expects that, as the economy recovers, he will be able to fulfill his promises of people feeling better in the streets. President Milei has been quite resilient in his approval ratings. Right now, his approval is in the 40s, which is historically relatively normal. It's quite impressive that Milei has sustained these levels of support with these indicators in terms of poverty and employment.

AS/COA Online: Congress has to approve the final budget, so now we move into a negotiation phase. Milei's austerity measures have already caused friction with the legislature, which is dominated by the opposition. What can we expect from the negotiations?

Díaz: It's very interesting to see how this government has learned how to do politics. Let's remember: This is a president without much political experience. He was just elected to Congress two years before becoming president, without a big political structure, without governors, without mayors. His handful of legislators are not a big team.

The current chief of staff, Guillermo Francos, has been instrumental in establishing relationships with other political sectors, with more traditional politicians, with governors, to build majorities, to get through some legislation. We saw that with the approval of the Ley Bases, which accomplished some of his promised reforms.

A few days ago, Congress approved a reform to increase pensions, affecting the fiscal balance that President Milei is trying to sustain. So, he vetoed that law, and then Congress tried to override that veto. But this time, again, the government was able to build the majority to sustain the veto.

I have to say that when the political will of the government is to get some things done in Congress, they have shown ability to do that. In the negotiation of the budget, we're going to see this dynamic and how the president and the government are skillfully playing, almost at some points, to divide the opposition and to make his position stronger.

AS/COA Online: What’s been the general reaction from investors to the budget proposal?

Díaz: The investor community is looking at what Milei is saying with a lot of interest. This is a president who is saying and trying to do what the investor community has been demanding for a long time in terms of keeping the fiscal discipline of Argentina in line. So listening to a president saying that he will prioritize the savings and servicing the debt before other things, of course, created a lot of good expectations from financial investors.

I would say that there's a sense of cautious optimism. It applies across the board for the general population and the investment community. At some point, the president will need to show some results, in order to sustain the patience of the society and sustain the optimism of investors. I think that's what everybody is waiting for. I have to say, this is a president that has surprised and exceeded expectations in the elections, in politics, and even in the economy. So I would give him at least the benefit of the doubt.

This interview has been edited for length and clarity.

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AS/COA Insider: Juan Cruz Díaz on Javier Milei's 2025 Budget Proposal

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