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KEY POINTS
1. Argentina has defaulted three times since 2001 on its international sovereign debt.
2. For the first time in 70 years, the government will move into a fiscal surplus without the aid of commodity windfalls or one-off privatization.
3. By year-end 2024, we believe growth slowdown will taper, creating a current account and primary budget surplus.
Argentina's libertarian president, Javier Milei, has recently received a rockstar-like reception at international gatherings such as the World Economic Forum in Davos, Switzerland, and the Milken Institute Global Conference in Beverly Hills, California, where he's been applauded by billionaires including Elon Musk, Peter Thiel and Stanley Druckenmiller. While many countries are ushering in a new era of big government, Milei is drastically reducing the size of the public sector to rescue Argentina from deep economic malaise. Global observers, wary of the trend towards increased state intervention and its economic implications, are closely following Milei's real-time economic experiment.
Argentina has been teetering on the brink of financial collapse for quite some time and has defaulted three times since 2001 on its international sovereign debt. The previous government, unable to tap international markets, resorted to fiscal monetization, essentially printing money to cover the budget deficit, fueling rampant inflation as the peso lost over 80% of its value. Currency and price controls led to shortages of basics like rice and coffee.
Milei swiftly enacts stringent fiscal reform
During his campaign, Milei symbolically brandished a chainsaw at rallies to emphasize his intention to fell the bureaucracy by making wholesale cuts in government spending. When Milei took office in December 2023, the country was facing 300% inflation, and he quickly enacted severe measures such as devaluing the peso and slashing government spending by 40%. This included reducing public spending on energy subsidies, cutting state-owned companies, and closing government agencies, resulting in thousands of public sector jobs losses. Argentina's fiscal deficit is now expected to improve by four to five percentage points of gross domestic product (GDP). For the first time in 70 years, the government will move into a fiscal surplus without the aid of commodity windfalls or one-off privatizations.
Popularity, policies bear fruit
Whether or not Milei is able to improve the Argentinean economy will largely depend on his popularity ratings. Previous reform-minded presidents failed because of strong political resistance to cuts in government spending. Despite a significant slowdown in economic growth growth - a catalyst for social unrest - polls show that Milei's approval rating at over 50%.1 It appears Argentineans realize a change is needed, even if it entails short-term pain.
Milei's fiscal shock therapy appears to be bearing fruit: the country has maintained a budget surplus for three consecutive months, and inflation in April fell to 8.8% month-over-month, down from over 25% in December.2
Growth is expected to improve in the second half of the year, driven by a bumper soyabean crop that could boost exports and turn the current account into a surplus. By the end of 2024, Argentina may see the growth slowdown in the rear-view mirror while recording a primary budget surplus and a current account surplus with a healthy build of foreign exchange (FX) reserves of more than $10 billion.3 Although the currency may face further depreciation pressure, Milei has prioritized tackling the fiscal deficit first. Surprisingly, the parallel FX Blue Chip Swap rate4 has moved closer to the official FX rate over the past few months.
Banks and commodity producers are likely to benefit from the economic environment. High interest rates hampered credit growth. However, as inflation falls and interest rates start to decrease, there is potential for increased borrowing, which would benefit banks. Additionally, Argentina's ample natural resources like soybean, corn, wheat and oil are expected to thrive under reduced government regulations and a lower tax regime.
Bottom line: We believe Milei's Argentina is on a positive trajectory with financial and commodity sectors poised to flourish amid improving economic conditions and regulatory environment.
1 Argentina Research published by Latin Securities, as of April 30, 2024.
2 Instituto Nacional de Estadística y Censos (INDEC) national statistics bureau.
3 IMF Staff and the Argentine Authorities Reach Staff-Level Agreement on Seventh Review under the Extended Fund Facility Arrangement.
4 The BlueChip Swap rate has historically diverged significantly from the official rate that is required to measure Argentinian peso-denominated transactions in U.S. dollars. However, this divergence has narrowed due to the devaluation of the peso in December 2023.
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