Unleashing Argentina's Economic Potential: Javier Milei's Reforms Crystallize Gains - Stock Market Soars 130% - Multiple Hurdles Loom
Unforeseen Event Occurs in Argentina
In the wake of Javier Milei's reforms, Argentine businesses have experienced a significant boost in value. The government bonds have also surged, marking a success story for 2024. Despite these successes, numerous challenges remain, with 2025's prosperity still tentative.
By Andreas Fink, Buenos Aires
The Argentine economy had already shown signs of improvement in 2023. However, Milei's drastic measures like devaluing the peso by 54% and slashing state spending in December sparked a cautious yet favorable response from the markets. Milei's party, "La Libertad Avanza," held little representation in both parliamentary chambers, which raised concerns. Nevertheless, stocks and government bonds rose steadily, thanks to speedy achievements in fiscal consolidation and inflation control. However, mid-year momentum skyrocketed after Milei pushed through a considerable legislative package, securing a year of broad executive powers.
In late July, Milei announced the termination of peso printing, denying inflation any room to manipulate. Alongside two vetoes, Milei prevented the parliament from raising pensions and university budgets against his will. Additionally, an amnesty on tax evasion brought approximately $20 billion into the banking system. Polls indicated that Milei's approval rating was stable, encouraging investors despite the painful austerity measures.
The Merval Index of the Buenos Aires Stock Exchange has surged since early August. For the entire year 2024, gains totaled more than 130%. The banking and energy sectors have seen the most benefits. Bank stocks, including Banco Galicia, Banco Macro, and BBVA, rose by an impressive 300% since December 2023. Energy companies, such as oil giant YPF and energy-related companies like Gas del Sur and Edenor, have also witnessed substantial growth. Bond markets have flourished as well, with daily gains of up to 1.8% reported in recent months for some dollar bonds, notably the "AL30C" government bonds that mature in 2030. Many Argentine bonds have more than tripled in value since mid-2022.
Is Brighter Skies Ahead?
"There will only be good news from now on," President Milei declared in November. Last week, the national statistics institute provided evidence in support of Milei's statement by announcing that Argentina's economy grew by 3.9% in the third quarter seasonally adjusted, causing J.P. Morgan's "country risk" index to continue its descent. The spread over US Treasury bonds that investors demand to hold Argentine debt fell to 663 basis points, down from over 2,000 basis points when Milei took office.
Will Argentina Step Back into the Credit Market?
The return to the credit market is one of Milei's declared goals, alongside Finance Minister Luis Caputo. The country still faces a hefty financial need, with about $4 billion due in January 2025 for debt service. To secure these payments, the country's gold reserves have been transported from Buenos Aires to London to serve as collateral for debt repayment to investors. If this transaction goes smoothly, the "country risk" should decrease even further, improving the chances of rolling over part of the debt. However, debt service is not the only challenge Milei faces. Argentina must prepare for severe damage compensation judgments due to malicious manipulations and nationalizations under the Kirchner governments. In the worst-case scenario, these liabilities could exceed $24 billion, a significant burden for the country. The currency reserves are still negative, a major obstacle to the abolition of exchange controls that Milei has promised for the following year.
The Lingering Shadows of Exchange Controls
Argentina has maintained exchange controls and restrictions on foreign exchange and capital market transactions for five years. These measures force exporters to sell their dollars, prevent companies from distributing dividends abroad, and limit private individuals in purchasing foreign currencies. As long as this regulatory framework remains in place, many companies will hesitate to invest in real projects. However, Argentina urgently needs these investments, as the recently announced recovery is based almost exclusively on increases in the less labor-intensive sectors of agriculture, oil/gas, and lithium. Construction, industry, and tourism have suffered significant losses, with some decline as high as 20%. Consumption may take several years to return to pre-Milei levels, following massive price increases for energy, water, health, and rents.
Many hurdles remain on the path to a robust and sustainable Argentine economy.
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- The surge in stocks and government bonds in the Argentine economy is a testament to the success of the reforms initiated by President Javier Milei during 2024, particularly in the areas of fiscal consolidation and inflation control.
- Despite the increased financial inflows experienced by Argentine businesses, the government faces numerous challenges in maintaining and improving economic growth, including the impending parliamentary elections, high inflation rates, and the need to meet stipulations set by the International Monetary Fund.
- A significant challenge looming for 2025 is Argentina's debt service of approximately $4 billion due in January, complicated further by the country's requirement to meet strict fiscal requirements related to the IMF agreement.
