Author | Andrew Stanners, Investment Director
Argentina has long been a beguiling and baffling country. Take new President Milei. I recall the striking images of the ultra-far-right candidate waving a chainsaw, which later became his trademark symbol, in front of a throng of supporters. Streets were blocked and roads closed as citizens demanded change. Milei ultimately emerged victorious.
Then, as president, he confounded commentators by empowering security forces to break up the very types of protests that brought him to power. It’s these types of extreme shifts that we as investors must try to unpick.
Is it different this time?
I visited Argentina in 2015 before Mauricio Macri’s presidential win. He stood out with his refreshing political and economic agenda. His manifesto demonstrated a willingness to tackle some of Argentina’s structural issues, such as capital controls, inflation, subsidies, and fiscal profligacy. The reality, alas, proved markedly different. His tenure was marred by a lack of urgency, cronyism and the relaxing of capital controls without a fiscal or inflation anchor. These failures – and those of successive left-wing governments – weigh heavily on Milei’s shoulders. The challenges he faces are considerable. Inflation now runs at over 270% (to end-February), the country is in recession, while two-in-five Argentinians live in poverty.
Nonetheless, there’s a palpable sense of excitement reminiscent of 2015. A radical libertarian economist, many admire Milei’s straight-talking approach. His policies are also direct. These include slashing social subsidies, halving the number of government ministries, dollarising the peso, and ‘dismantling’ the country’s central bank. He believes trade and exports, not the government, can solve Argentina’s problems.
If he succeeds, Argentina may once again find itself on the path towards stability.
Can he deliver? To help answer that, I spoke with government and opposition officials, pollsters, economists, food and energy experts, the International Monetary Fund (IMF), and central bank policymakers to get their views on this enigmatic and relatively unknown leader.
Politics – a deal on the table?
Sifting through the complex political relationships, it becomes clear Milei plans to exploit the animosity between the centre-left coalition, Union por la Patria, and other parties. This division will be crucial if the government is to deliver legislative success. Milei already faces an uphill battle before the 2025 midterms. At the time of my arrival, the government’s far-reaching ‘omnibus’ bill had been withdrawn in the face of staunch opposition.
But gridlock allowed him to announce an unconventional policy regime that caught most incumbent politicians off guard. This included devaluing the peso by 54%, overhauling its crawling peg, and announcing massive spending cuts. He also squeezed governors on spending and forced Congress to reject bills that would have increased state pensions. These moves underline Milei’s message that it’s him and the people versus the elite.
His popularity remains high. Milei’s policies for tackling triple-digit inflation are resonating with voters. Poliarquia Consultants indicates he has broad-based gender support and strong numbers among youth voters (his approval rating is 60% with 18-29 year-olds). He also has good numbers outside of the capital, Buenos Aires (+60%).
From my meetings, I get a sense there’s a deal to be done on the ‘omnibus’ bill. But Milei will need to barter fiscal transfer from the federal government to gain support for his bill. Nearly all politicians I spoke with understand these transfers are needed to ensure midterm success. There seems to be little ideological pushback, as a result. Putting all this together, I think legislative agreement is likely, albeit with the prospect of some watering down of fiscal policies.
The importance of the export sector, principally agriculture and energy
The previous administration faced a dire agricultural position in the final year of power thanks to the worst drought in 60 years. Production nosed-dived, putting severe strain on the economy. Wheat production was down 80% versus 2021/22, followed by soybean 39% (the worst in five years) and corn 33% [1]. The good news is production should recover in 2024, with around 50% of stock sold between May and August.
For me, currency devaluation is the primary weakness in Milei’s economic plans. That said, current messaging suggests no further manipulation of the peso. Milei also confirmed that the lifting of capital controls will be measured. If successful, we could see the country’s capital reserves continue to grow over the coming quarters.
The energy sector is also showing promise after decades of false dawns. Oil production was up 10% year-on-year in December [2]. The external balance has moved into surplus, while we’re likely to see an adjustment in the controversial energy subsidies/electricity tariffs. As is often the case, however, this strength will diminish in the second half of the year. The agricultural harvest season will have passed and, as the economy recovers, this will boost depressed import demand. Nonetheless, the picture remains encouraging.
With a secure fiscal anchor, is the monetary side the weak link?
The Central Bank of the Argentine Republic introduced the Bond for the Recovery of a Free Argentina (Bopreals), which importers of goods and services can purchase. Are they a panacea to Argentina’s problems? The bonds certainly make policymakers appear in control and help address the overhang of dollar demand from importers. But Bopreals add significantly to the debt burden, culminating in US$5.25 billion in repayments by 2027 [3].
There’s also a glaring disconnect between the Bank’s monetary policy and the prospect of a more stable balance sheet. Its stance is rooted in its unwavering determination to drain liquidity and therefore inflation.
So, where does that leave us?
The economists I spoke with think inflation will come in lower than the market anticipates, possibly to double-digits. Rebalancing the fiscal position is also ahead of schedule. Of course, there will still be pressures around pension reform and a sunset clause for export taxes as the year progresses. However, I still think the government has time to negotiate a legislative deal.
The other positive surprise comes from the IMF program, which could provide access to additional financing and alleviate some pressures from upcoming payments. IMF negotiations are set to commence by the summer. Addressing net-financing in 2025 should provide fiscal flexibility leading up to the midterm elections.
There are unknowns. Eurobond payments are set to double in 2025, with a restructuring or friendly reprofiling likely either this year or next. Relaxed capital controls and currency unification are integral to the existing plan. But these actions are inconsistent with a concerted effort to crush inflation. As a result, there are doubts regarding the precise timing and scope of the plan's implementation.
Final thoughts…
In my view, bonds look cheaper than we forecast earlier this year. On my return, I recommended we extend our overweight position to capitalise on better-than-expected political developments, positive IMF statements, and the absence of immediate currency devaluation/adjustment concerns.
Key risks include a hit to Milei’s popularity, which could force him to change policy tack. The economy is undergoing a substantial growth shock as part of its rebalancing process. This is designed to provide breathing room for the external position, allowing reserve accumulation and arresting rampant inflation. However, the government must implement structural measures or progress could gradually unravel. All eyes will be on the second half of the year.
- INDEC, 2024
- G&G, 2024
- Ministry of Economy, 2024
Risk warning