Can Javier Milei revitalize Argentina's economy to its previous state?
In independent Argentina, the latest presidency under Javier Milei has marked a decisive shift towards economic reform. Since the country's inception in 1816, Argentina has defaulted on its sovereign debt nine times, with the most recent default occurring in 2020 [1]. Now, Milei's administration is implementing stringent measures aimed at ending persistent political instability, escalating prices, and excessive government spending.
The country's civil service ranks have seen significant reductions, with tens of thousands of public employees laid off [2]. Simultaneously, Milei has initiated a substantial reduction in red tape as part of a so-called "chainsaw budget-cutting" approach [2]. These efforts have succeeded in tempering the rampant inflation that had plagued Argentina, with monthly inflation rates falling from 20% at the end of 2023 to just 2% as of the present [2].
A noteworthy aspect of Milei's reforms is the largely peaceful response from Argentine citizens, many of whom recognize the necessity for change. The anticipated massive nationwide strikes or riots have been avoided [2].
The financial world has exhibited a positive response to Milei's initiatives. Argentina's government bonds have experienced a remarkable rally, while the local Merval share index has climbed by two-thirds within the past year [2]. Previously, Argentina was ejected from the MSCI Emerging Markets (EM) index in 2021, a consequence of restrictive currency controls [2]. In light of Milei's liberalization policies, there is growing speculation that the nation may re-enter the EM index in the near future [3].
For the typical investor, an Argentine return to the EM index wouldn't significantly alter holdings, as Argentine shares would account for only 0.2% of the overall EM index [3]. However, a return to EM status would indirectly stimulate funding, with around $1 billion pouring into Buenos Aires from global funds that track the MSCI EM index [3].
Yet, the road ahead is not without obstacles for Milei's reforms. Discontentment is beginning to surface, as evidenced by a recent general strike [4]. Although Milei remains popular, his approval rating has dipped in the face of economic austerity [4].
Last year, the victory over inflation was partly achieved through strict capital controls and a currency peg [5]. This approach, however, deters foreign investors and consumes scarce central bank reserves [5]. As a result, last week, with billions of fresh IMF loan proceeds available, Milei significantly relaxed currency regulations [5].
Milei's decision to partially float the Argentine peso is a high-stakes move, with the potential for inflation to surge before October's midterm elections [6]. The currency depreciated by 6% against the dollar in the first week of the float, illustrating less significant depreciation than anticipated, and suggesting that markets continue to have faith in Milei [6].
While the left-wing Peronist opposition continues to be widely scapegoated for Argentina's economic woes [7], Milei may still amplify his minuscule congressional minority later this year.
Juan Pablo Spinetto suggests that Argentina's history is characterized by a non-stop sequence of economic mismanagement [7]. However, Spinetto contends that the Milei administration presents the nation with its "best shot in many years" to bring an end to chronic overspending and money printing [7]. If successful, Argentina could potentially transform from a cautionary tale into a more typical country.
Sources [1-7]: see enrichment data.
Argentina's government bonds have experienced a significant rally in response to Milei's economic reforms, reflecting improved sentiment from the financial world [2]. The implementation of these reforms has resulted in a substantial reduction in Argentina's budget deficit, which could attract more foreign investors and boost the country's business environment [6].
