Argentina economic stabilization policy and the cost of inaction, Digi Mart USA News (Argentina): In economics, things take longer to happen than one expects, and when they finally happen, they do so much faster than one would have imagined. That well-known reflection by Rudi Dornbusch carries a warning particularly relevant to Argentina.
During a stabilization program, it is difficult to know whether difficulties are temporary and require only patience, or whether they signal that something must be corrected.
President Javier Milei has made perseverance a hallmark of his government. He speaks of “tying oneself to the mast,” of “dying with boots on,” and of not “erasing with the elbow what was written by hand.” Determination has value in a country that has abandoned countless stabilization efforts at the first sign of trouble.
The risk arises when sticking to objectives is confused with keeping every instrument intact.
Vice Minister José Luis Daza recently acknowledged that the economy is growing less than expected and asked for patience so that investments and the benefits of the new model can mature. He may be right.
But patience alone is not a strategy. An economic program requires a diagnosis, a design, implementation, communication and, finally, monitoring and a willingness to review what has been decided.
On the diagnosis, the author’s agreement with the government is broad. Argentina needed to end fiscal dominance over monetary policy, reduce inflation, eliminate distortions and open space for investment and productivity.
Fiscal balance and disinflation are important achievements. Questioning certain aspects of the program does not mean ignoring them or proposing a return to the past.
Differences begin in design and implementation. The succession of phases left unresolved the transition toward a medium-term monetary and exchange-rate regime.
Controls, exchange-rate bands and a monetary policy whose relationship with the Treasury’s financial operations is not always transparent persist. The latest Monetary Policy Report of the central bank devoted little attention to how the bands will function and what the monetary authority would do if reserve targets, peso demand and exchange-rate stability came into conflict.
Some transitions introduced unnecessary volatility, and some stabilization measures advanced much faster than reforms meant to reduce production costs and help companies and workers adapt. Not all of these differences in pace are errors, since structural reforms require agreements, investment and time.
But how that interval is managed matters. Communication also matters.
Displaying supposedly extraordinary dollar “arsenals” to face a run, or systematically dismissing criticism, can increase the uncertainty it seeks to dispel.
The decisive question, however, is the government’s willingness to revise its decisions when reality does not confirm the assumptions on which they were based. The reserve accumulation strategy rests partly on disinflation restoring demand for pesos.
If the public wishes to hold more national currency, the central bank can buy foreign currency and issue pesos without necessarily generating inflationary pressure. But for now, remonetization remains elusive.
In 2027, proximity to elections could intensify dollar hoarding and reduce demand for peso-denominated assets.
At the same time, the Treasury must roll over local-currency maturities and obtain foreign currency to meet its external payments. In those circumstances, lower willingness to roll over debt could force the Treasury to offer higher rates or use its deposits to pay maturities.
The first option raises the cost of public and private financing and may deepen weakness in economic activity. The second returns liquidity to the market at a time when some holders may prefer dollars.
The central bank would then have to decide how much to absorb, what exchange-rate pressure to tolerate and how to preserve reserves. There is no inevitable crisis here, but there is a set of decisions with costs that the mere passage of time will not resolve.
Financial signals make this debate more important. The recent rise in country risk and the deterioration of Argentine bonds cannot be attributed solely to global risk aversion.
Doubts about reserves, maturities, monetary policy and activity are predominantly local. This does not mean markets are always right.
But ignoring a persistent trend because it contradicts official conviction can be dangerous. Higher country risk makes it harder to recover financing, and that difficulty can in turn feed the doubts that pushed it up.
Correcting course also has costs. Changing an emphatically defended instrument may appear to be a concession, provoke volatility or be interpreted as abandoning the course.
For a president who has made doctrinal coherence a political attribute, that perception probably weighs heavily. But there is an asymmetry: the cost of correcting tends to be immediate and visible, while the cost of not doing so accumulates gradually through high interest rates, lower investment, credit difficulties and job losses.
When it finally appears in asset prices, the room to act may be considerably smaller.
The author supports a more open and productive Argentina. The new geopolitical map, with greater demand for reliable suppliers of food, energy and minerals, offers extraordinary opportunities.
Vaca Muerta, mining and agribusiness can sustainably expand exports. But the benefits of these transformations take time to materialize and do not automatically reach the entire economy.
The question is not only what kind of country we want in ten years, but how we get through the next two or three without weakening the conditions needed to reach it.
For that reason, the dilemma should not be framed as perseverance versus abandoning the program. The goal is to preserve fiscal balance, disinflation and reforms while keeping the freedom to correct tools that are not producing the expected results.
No one can specify in advance the optimal moment for a correction. Waiting can be sensible, but not when any revision has been ruled out in advance.
Tying oneself to the mast should not mean closing one’s eyes to changes in the sea. The cost of inaction is not only that problems persist.
It is that when a decision to act is finally made, a correction that was once possible and orderly has become urgent, more painful or even insufficient.
