Can recently elected chainsaw-wielding Javier Milei revive Argentina’s economy? By Ben Edwards.
When self-styled 'anarcho-capitalist' Javier Milei pulled off a shock victory in Argentina's presidential election in November, he promised to take a chainsaw to excessive government spending and bring a halt to the country’s decades-long decline. That script might be different, but it is a story that Argentina has seen and heard before – a reformist president taking on the country’s dysfunctional political system and seeking to revive its beleaguered economy. The only question is whether this time the story will have a different ending.
"We’ve had decades of large adjustment programmes in Argentina, but they have all ended up in recession or default and in a switch back to Peronism or Kirchnerism," said Aaron Gifford, a sovereign credit analyst at T Rowe Price. "When [Mauricio] Macri came in, for example, he tried to play by the books. He had a really good economic team in place. They had more of a gradual economic adjustment programme to minimise social backlash, but they just couldn’t pull it off – the economy dipped into recession, Macri’s approval ratings didn’t hold up, and they lost the election."
The main character this time round is certainly a departure from previous reformist presidents who have been cast in the leading role. Milei, a former economics professor and regular talking head on Argentine TV, is a far-right libertarian politician who has a reputation for being theatrical (from wielding his now infamous chainsaw on the campaign trail to smashing up a pinata on TV) and unapologetically outspoken (calling the Spanish prime minister’s wife "corrupt" and Colombia’s president a “terrorist murderer"). He has been compared to both Donald Trump and Jair Bolsonaro.
Yet while Milei may not strike any resemblance to Macri personality-wise, the economic dumpster fire he faces has echoes of the smouldering mess Macri had to try to clean up in 2015.
"Milei inherited a very difficult fiscal position – negative net FX reserves; a huge debt burden, particularly on the local side where he’s had to roll over a significant amount of maturities; a bloated central bank balance sheet; extensive capital controls to try to anchor the currency; and extremely high inflation," said Gifford.
Indeed, annual inflation is the highest it has been in decades, rising to 211% in 2023 – the most in 32 years. Argentina’s exchange rate – which has been artificially propped up since 2019 – varies wildly depending on whether you look at the official rate or the black market rate. In the wake of last August’s primary elections, for instance, the official rate was roughly 350 pesos to the dollar. If you wanted to buy a dollar on the black market, however, you needed more than double that (720 pesos, to be exact), according to FocusEconomics.
Another target for Milei’s chainsaw is Argentina’s bloated public sector. Historically, its size was about 25% of GDP – more or less average for the Latin America region, according to Sebastian Briozzo, a credit analyst at S&P Global. That changed following the commodity boom in the early 2000s, with the public sector swelling to about 41% of GDP.
"The problem was they spent all the money from the commodity boom but kept the spending machine going without the revenue," said Briozzo. “You have a very comprehensive welfare state, which is neither good nor bad – the problem is how you finance it.”
With the first six months of his presidency now completed, progress so far has been positive.
"The Milei administration’s efforts to stabilise the macroeconomy continue unhindered, underpinned by a strong commitment to fiscal discipline," said Diego Pereira, chief economist for the Southern Cone and Andeans at JP Morgan. "This front-loaded effort is reflected in the fiscal surplus recorded in the first quarter of the year, amounting to 0.2% of GDP. It is important to note that the reduction in real expenditures has accounted for a significant portion of the fiscal adjustment year-to-date, which we have described as the preservation of inflation tax proceeds."
While inflation is still sky-high on an annual basis (hitting almost 300% in April), the pace of price rises has started to slow month-over-month, easing to 9% in April from 11% in March. The government has also managed to increase its US dollar holdings.
"The positive thing is they’ve been able to accumulate international reserves – it was about minus US$11bn when Milei came into office – now it’s nearly back to flat on a net basis,” said Gifford. "But what we’re all waiting for is what’s the next step in terms of allowing the currency to more gradually float, releasing some of those capital controls and allowing the economy to grow?"
Different ending?
While investors have been encouraged by Milei’s efforts so far, it is still way too early to call whether his presidency is going to conclude any differently than previous efforts to revive the Argentine economy.
"I’m marginally more optimistic, but my overall view would be that the jury is still out," said Graham Stock, emerging market debt senior sovereign strategist at BlueBay Asset Management. "A lot of the gains that we’ve seen so far are a result of executive actions and the effect of very high inflation."
Regardless of how those gains have been delivered, this progress means that, for now, Milei’s popularity is also holding up. His approval rating was 49% in April, only marginally lower than in March, the Buenos Aires Times reported.
"His popularity has dipped a bit from when he first won the election, but not dramatically," said Stock. "That’s the key variable to watch, because if his popularity stays at reasonable levels, then he will get political support for the measures that are needed, and importantly, be given a bit more time to implement the right policies. If his popularity drops, then the fact he is trying to do unpopular things could mean that his term comes to a very sticky end. What’s really needed now to consolidate that progress is the passage of legislation."
Those legislative efforts have proved challenging. Milei first sent his ambitious package of reforms known as the 'omnibus bill' to congress back in December last year complete with 664 articles that would have privatised dozens of state-owned companies and increased export duties, among many other economic changes. Lawmakers rejected the bill, however – forcing him back to the drawing board.
"The Milei administration has a minority in congress and no provincial governors," said Pereira. "That makes governability a challenge, particularly when aiming for structural reforms. It should be noted that real GDP has proved stagnant for more than a decade, and real per capita is down by more than 12% since its peak back in 2011. The proposed reforms would set the basis for higher potential growth ahead, what this country needs to help secure the fiscal consolidation path in the years to come."
To get his reforms closer to passing, Milei had to take a chainsaw to his own proposals, cutting the number of articles in the bill to 232. That meant carving out a raft of measures that had proved too controversial for lawmakers, such as labour reform and reducing income for the trade unions.
"The original proposal would have dramatically undermined the power of the unions," said Stock. "That would be good in one sense, because the unions arguably are an obstacle to reform in Argentina. But also it would be risky in terms of the upheaval it would mean for the political system. Even the moderates, let alone the left in congress, have links into those unions and were reluctant to overturn the applecart."
Taxing times
Despite his lack of backing in congress, Milei has been able to exert some influence, not least when it comes to tax matters. Back in October, presidential candidate and former finance minister Sergio Massa had exempted the majority of Argentines from paying income tax, ostensibly as a measure to cushion them from the strains of high inflation but what was also in effect a pre-election giveaway. For Argentina’s cash-strapped provinces, which partly rely on income tax for funding, that is something Milei has been able to use to his advantage in negotiations.
"While Milei still has some political leverage given his ability to withhold funding from important stakeholders like provinces, he’s had to allow for a significant watering down of legislation to improve its chances of getting through congress,” said Gifford. “Meanwhile, we’re already starting to see some backtracking on things like tariff adjustments to soften the blow on household finances."
Despite the reforms still not passing by the end of the first week in June, market watchers believed the green light was imminent – a potentially significant milestone given that it would imply governability is possible for Milei despite the opposition he faces in congress. However, maintaining public support may be a greater obstacle in the long run.
"The biggest challenge is if the recession deepens, if unemployment accelerates and if poverty levels increase," said Edwin Gutierrez, head of emerging market sovereign debt at abrdn. “Thus far, however, the majority of the populace seems to be going along with this adjustment.”
Just how long they do go along with the adjustment will be a test of the population’s patience, which, as Macri discovered, has a fairly limited shelf-life when it comes to tolerating economic pain.
"When you’re doing this kind of adjustment, it is brutal,” said Joydeep Mukherji, a credit analyst at S&P Global. “They’re running a primary budget surplus. So that means they’re not spending – and how long can you do this politically before you need to at least show some positive results?"
Milei is not trying to sugar-coat his plan – he has explicitly told Argentines that not only are things awful, they are going to get worse because he is going to make them worse, said Mukherji. Only once that adjustment is complete, things will then start to get better, Milei claims.
"That’s not a message that normally sells," said Mukherji. “So he’s only got a limited amount of time to inflict this pain. The longer you drag this out, the worse the risk is. The quicker you do it, the better it is. So it’s really a question of how much the society will take. That’s a question nobody can answer at the moment."
It is a question, however, that will be answered come Argentina’s midterm elections next year, when voters will either be able to make Milei’s job easier by increasing the number of seats his party, La Libertad Avanza, has in congress, or hand more power to the opposition.
"It will inevitably be a referendum on how he’s done," said Gutierrez. "The risk is that if he doesn’t do well, he becomes a lame duck for his last two years. So he needs the economy recovering and just sentiment being a lot better heading into those midterm elections. That’s not until October next year, so he’s still got a year so. But it is a calculated gamble he is making – for Argentina to take its bitter medicine now for it to emerge stronger heading into the elections."
Tricky call
This uncertainty is making the investment outlook for Argentina tricky to call.
"I was in Argentina recently speaking with a lot of local investors and what they have been saying is bonds will either be at 80 cents on the dollar or 20 cents on the dollar,” said Gifford.
"Those are the tails right now – we have a 60% probability that it will go to 80, but there’s still a 40% probability that it could go to 20. So it’s very much a bimodal outcome, and that outcome depends on Milei’s ability to make it to the midterm elections and have a good showing to make it to the next elections. There needs to be a smooth transition to the next government that’s not just going to completely reverse everything."
While bond payments are manageable for the remainder of 2024, the country’s debt problems may resurface again next year. Eurobond payments are set to double in 2025 and issuing new bonds is a distant prospect given where its existing debt is currently trading. For example, its 10-year dollar bond maturing July 2035 was trading at just under 40 cents on the dollar in early June, yielding not far off 20%. While that is an improvement on where it was trading before Milei came to power (about 23.50 cents on the dollar at their lowest point in October), it is still a long way from a sustainable level where the country would be able to tap international capital markets.
"Realistically, market access for new money is not happening, nor is it a good idea with yields where they are,” said Gutierrez. “Granted, if the reforms go though, yields are going to fall from here. But we’re nowhere close to Argentina being able to issue."
That backdrop means Argentina will likely need to negotiate with bondholders about a potential debt reprofiling to buy them more time and avoid a messy default.
"There’s a lot of things that would need to fall into place before they would consider doing it, and realistically they can only consider that from a position of strength so they can say everything is working so far, give us more breathing room to get the economy back on track," said Gutierrez. "The argument would be we’ve just got the patient off of life support, it’s still too early to be making significant demands on the patient. Let’s give them some time to continue to convalesce."
Given the coupon schedule next year, Argentina will likely need to start having those conversations with investors towards the end of this year or early next, according to Gutierrez.
"By then, we’re going to have a decent sense of what is going on – how is progress going on reform and the economy, and then they can start having those discussions," he said.
Aside from bondholders, Argentina also owes the IMF just over US$40bn from a US$44bn loan programme secured under Macri. The IMF agreed to disburse US$4.7bn in funding earlier this year in response to efforts by the Milei administration to get the programme back on track after the previous government failed to meet the fund’s economic targets.
"The IMF wants to see that the adjustment is not just a result of executive action but also is underpinned by legislation," said Stock. "That in turn would pave the way for the lifting or easing of capital controls. That’s probably not a prerequisite for the fund, but they want to see a roadmap that includes the loosening of capital controls just as a mechanism to get a fairly valued exchange rate."
People power
While bond investors and the IMF want to see progress on the policy front, it is ultimately ordinary Argentines that will seal Milei’s long-term fate. If he can avoid public unrest, then there is a chance he can turn Argentina’s fortunes around. However, protests on university campuses in April over Milei’s austerity measures served as a sharp reminder of how things can unravel in the country when people start taking to the streets.
"That is something that we’ll need to keep a very close eye one,” said Stock. “University students protesting is one thing, but if that spreads to public sector workers or just mass protests more broadly, that would be a very negative sign. That’s the kind of thing that brought down governments before and it’s tied to the level of support that Milei enjoys. So while his popularity is quite high, it’s unlikely that those protests spread, but if protests in the universities are seen as the thin end of the wedge, then things could deteriorate quite quickly."
Regardless of Milei’s future, the healing process for Argentina’s economy is likely to take longer than the four-year political cycle, which means any policy successes his administration achieves need to be durable.
"If he doesn’t get re-elected, it’s a bad sign, because the issue that Argentina faces is 20 years of damage done, and it can’t be unwound in one term – that’s unrealistic," said Gutierrez. "This is something that has to be perpetuated. Investors need to be convinced that Milei is around for longer and that these reforms aren’t going to be reversed. So until we know that, it’s very difficult to project what the medium and long-term outlook is for Argentina. It’s off to a good start but this is truly a marathon. He’s done the first few miles but he’s got a couple dozen more to do.”
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