Argentina: Milei’s First set of Laws Rejected in the Chamber of Deputies
JJavier Milei's ambitious deregulation laws for the Argentine economy faced rejection in the Chamber of Deputies, signaling challenges in negotiating with the current Congress. Milei's government must now revise its strategy, possibly focusing on less contentious issues. Despite setbacks, the government retains control over certain budget aspects but faces inflationary pressures amidst fiscal adjustments. Adjustments are needed in fiscal and monetary policies, while dollarization remains distant.
Javier Milei's large laws that sought to deregulate the Argentine economy were rejected in the Chamber of Deputies. After being approved in the preliminary commission of the Chamber, in a process which saw the articles of the law being reduced to over 300 from over 600, the majority of the Deputies decided that the project of the law should return to the Commission for discussion. Even though this does not mean that chunks of the project cannot be approved, it reveals the toughness of Milei’s project to negotiate with the current Argentine Congress. Additionally, Milei’s strategy of relying on the high popularity of his government to apply a shock to the Argentine regime was stopped by an organized opposition which holds around 42% of the Chamber of Deputies' seats.
Now, Milei’s government will need to change their strategy. One option is to try to approve an even lower portion of the project. Themes such as privatization of state companies, reform of pensions, and the delegation of laws to the executive are very sensitive to the deputies and they will need to be postponed. One of the best aspects of Milei's plan was that the approval of the delegation of laws on fiscal and economic terms would allow his government to make deep changes to the Argentine fiscal regime; now it seems they will need to negotiate with the Congress, and reaching consensus there will not be an easy task.
However, this does not mean Milei’s government is fully handcuffed. The government can still control certain parts of the Argentine budget, especially involving employed payrolls, and they can still try to seek other ways to finance their deficit if it continues to exist. A new strategy has been lowering the policy rate and emitting federal government debts, making banks and enterprises move from Central Bank papers towards government ones, and thus reducing the need for monetary emissions.
Needless to say, markets will not enjoy this news, and the strong inflation aligning with the fiscal adjustment is likely to have an inflationary impact in the short term. The good news is that the harvest will be better this year, allowing the central bank to accumulate reserves, although they are still very depleted. Conditions for dollarization are clearly not on the horizon, and the government will need to continue restricting the access of the dollar to the Argentineans, although it will try to diminish the difference between the rate of the black market and the official exchange rate. In relation to the IMF, not much changes; the deal will continue to go on, but with quantitative targets not being fully met.