President Milei's Economic Reforms: A Turbulent Ride - Argentina's Stock Market Soars 130%, But老大哥 Still Faces Tough Times
Unexpected Event in Argentina
Argentine presidoñ Javier Milei's economic reforms have produced striking results for the nation's businesses and government bonds. Thanks to reduced inflation rates, budget surpluses, and a devalued peso, the story is one of success. However, the future remains uncertain, with many hurdles looming ahead.
By Andreas Fink, Buenos Aires
Argentine stocks and bonds were on the rise even before Milei took office in 2023. But when he devalued the peso by 54% and slashed public spending in December, while his party "La Libertad Avanza" held only a small presence in both parliamentary chambers, markets reacted with cautious optimism. Low inflation rates and budget surpluses in 2024 reaffirmed the markets' trust, and stocks and bonds increased modestly. However, Milei's passing of a legislative package in mid-year and an announcement that he would no longer print new pesos shifted the tide. Despite facing critique and controversy, Milei's approval rating remained steady at around 57%.
The Merval Index of the Buenos Aires Stock Exchange jumped significantly since August. Gains for the entire year 2024 surpassed 130% in U.S. dollars. The banking and energy sectors prospered the most. Bank stocks like Banco Galicia, Banco Macro, and BBVA rose by 300% since December 2023, while energy companies saw substantial gains. Notably, oil giant YPF, exploiting vast oil and gas reserves, and energy-related companies like Gas del Sur and Edenor all experienced growth. Bond markets also boomed, with some dollar bonds showing daily gains of up to 1.8% recently. The "AL30C" government bonds, maturing in 2030, particularly excelled, with their value more than tripling since mid-2022.
All Sunshine Ahead?
"From now on, it's only bright skies," President Milei declared in November. Last week, the national statistics institute confirmed his assertion by announcing that Argentina's economy had grown by 3.9% seasonally adjusted in the third quarter. Investors' confidence was justified, as J.P. Morgan's "country risk" index continued to drop. The spread over U.S. Treasury bonds that investors demand to hold Argentine debt narrowed to 663 basis points, a significant drop from over 2,000 basis points when Milei took office.
The Promise of Prosperity, But Delivering It Another Challenge
If Argentina aims to secure external financing to sustain its recovery, it will have to pay 6.63% more interest in U.S. Treasury bonds. The return to the markets is a goal for Milei, but the country still faces substantial financial obligations, with almost $20 billion in debt payments due next year, almost $4 billion of which is due in January. To ensure debt repayments, the country's gold reserves have been transferred from Buenos Aires to London to serve as collateral. If Argentina successfully navigates these hurdles, the "country risk" index should fall further, enhancing the possibility of refinancing part of the debt.
But Debt Service Isn't the Only Concern
Preparing for lawsuits related to damage compensation due to actions taken during the Kirchner administrations presents additional challenges. These claims, which could total more than $24 billion, are a significant threat to Argentina's financial stability, as the country currently does not possess that amount. Currency reserves remain negative, a major obstacle to the abolition of exchange controls promised for next year. Since 2017, Argentina has restricted foreign exchange transactions and forced exporters to sell their dollars. These controls also limit private individuals from purchasing foreign currencies, a roadblock for companies considering investments. Yet, with the agricultural, oil/gas, and lithium sectors experiencing a resurgence, the need for new investments is evident. However, construction, industry, and tourism sectors have suffered massive losses, some up to over 20%. Recovery in these areas will likely take years following significant price increases for energy, water, health, and rents.
Navigating the Storm Ahead
To eliminate toxic exchange controls, Argentina requires additional financing to minimize the risk of a run on released dollars, with at least $15 billion mentioned as a possible sum. Reliance on support from ally Donald Trump at the IMF and potential private financing will be crucial for the country's continued development. As Milei gains more votes in parliamentary elections in October, dissolving exchange controls may become possible. Managing these challenges will impact the health of Argentina's financial markets. A smooth debt service and the possibility of refinancing part of the debt will have positive effects, while IMF support and continued economic reforms can attract new investments and improve the stock market. However, excessive damage claims or continued appreciation of the peso could have negative repercussions. Argentina remains a risky investment in 2025.
Source:
- Economist Intelligence Unit (EIU)
- Reuters
- Bloomberg
- The Financial Times
- In the context of Argentina's economic reforms, President Milei's decision to devalue the peso and reduce public spending led to a rise in government bonds even before he took office in 2023.
- The stocks and bonds continued to surge in 2024, with the Merval Index showing a gain of over 130% and certain dollar bonds displaying daily gains of up to 1.8%.
- As part of the economic consolidation, Milei's government passed a legislative package and announced an end to the printing of new pesos, which shifted the market's cautious optimism to skepticism.
- Despite facing critiques and controversies, Milei's approval rating remained steady, implying a certain level of confidence in his economic reforms among the general public.
- As Argentina navigates the financial obligations, especially the substantial debt payments due in 2025, garnering external financing, managing lawsuits related to damage compensation, and eliminating harmful exchange controls will be crucial for the nation's economic growth and attracting further investments in the business sector.
