Geopolitics & Luxury. The election of Javier Milei in Argentina: what consequences for luxury?

The libertarian Javier Milei will soon be Argentina's new president. For Latin America's third-largest economy, the current situation is not the most pleasant: inflation is soaring, with the price index reaching 140% and expected to reach +185% in December. The peso suffered a significant loss of value through repeated crises and chronic inflation. Today, one dollar costs 350 pesos. Argentina is one of the most indebted emerging countries (the IMF has lent the country $45 billion), and over 40% of the population lives below the poverty line, relying heavily on public aid to survive. On this aid, Javier Milei intends to strike the hardest, drastically limiting public spending and reducing the number of ministries.

To stabilize the economy, Milei intends to implement dollarization, i.e., to replace the peso with the US dollar within a few years. While his pledge is to halt the decline in Argentines' purchasing power - a move that could be beneficial for the sale of luxury goods, of which Argentines are very fond, as the country ranks third in Latin America after Mexico and Brazil - many economists are highly skeptical of the new president's plans. The dollar reserves are currently negative. In September, 200 economists released a letter denouncing this dangerous strategy, which would further weaken Argentina and expose it to the hazards of foreign shocks.

Even if Milei pledges "to slash the budget with a chainsaw," as he likes to say in his meetings, this strategy could prove very dangerous in the long term. Poverty, social inequality, and rising unemployment (currently 7.6%) will all likely increase and foreign investors will be discouraged by the looming instability.

On the other hand, the promise of lower taxes and a totally liberalized economy could attract foreign companies looking for a low-tax regime. So it is difficult to say what the strategy of the luxury sector will be in the face of this political upheaval. Will Argentina continue to tax its exports directly (one of the few countries to do so)? Given that this tax was mainly used to finance some public assistance during the Kirchner presidency, what consequences will the announced budget cuts have on social assistance? Will Milei give up these receipts?

A further driver of instability that could affect foreign investors' appetite is Milei's announced abolition of the National Bank. The president announced this measure in order to counter inflation and stop the frequent printing of money.

Ten years ago, luxury brands were fleeing the country, exhausted by the commercial constraints dictated by the administration on imports and all the measures to preserve the trade surplus. Ralph Lauren, Yves Saint Laurent, and Armani had all given up doing business in the country. Exports of domestic products were obligatory for the same amount as imports, hampering the fluidity of trade and jeopardizing the financial equilibrium of foreign companies, except for a few companies like Ermenegildo Zegna, which found a solution by exporting local wool from Patagonia for the same amount as its imported products. The successive easing of measures has enabled several high-end brands to come back.

In the short term, luxury firms could flock back if the market is completely disrupted. An argument that could favor this theory, marginal for the moment, but which could carry weight in the future: Argentina ranks 15th worldwide in crypto-currency adoption. It is ahead of France, which is in 23rd position. The new president has shown himself to be rather favorable to this financial tool and - if we consider that several luxury houses are starting to accept crypto-currencies - this could enable firms to maintain their presence in Argentina by using this means of payment for customers, as an alternative to the local currency. While, for the moment, this is an embryonic reality, the importance of cryptos in the South American economy (El Salvador has adopted crypto-currencies as its official currency) could weigh on the choices of economic players in the future.

However, the extreme libertarian agenda envisioned by the new president risks triggering, for the time being, a new phase of instability in the medium term, something the brands loathe and for which the country's entire population is likely to pay the price.