Will Milei be able to avert disaster? Financiers and economists collide in their forecasts for Argentina

As Covid-19 demonstrated, a public health crisis can expose the economic, political and social fragilities of any country. Argentina has been going through the worst dengue outbreak in its history since mid-March, with more than 269,000 cases recorded, which is 11 times higher than the number of cases that were registered in the summer of 2023.

The far-right administration of Javier Milei — who took office this past December — has ruled out increasing the budget for awareness campaigns, or even mandating vaccinations against this tropical infection. This inaction is due to the government’s attempt to reduce public spending and pay down debt — two of Milei’s main campaign promises. The initial economic figures announced by the government following the implementation of this strategy have earned the approval of the financial markets.

While waiting for the data from March — which will be announced on Monday, April 22 — it’s already clear that Argentina managed to leave behind 12 years of monthly fiscal imbalances in January and February of 2024, when budget surpluses were recorded. This puts the country on track to meet its agreement with the International Monetary Fund (IMF), which sets an extremely ambitious goal of a fiscal surplus of 2% of GDP by the end of 2024. However, federal subsidies — concentrated in the transportation and energy sectors — represent 1.8% of total GDP. Official data indicates that, in the first quarter of this year, total government spending fell by 29.7% compared to the first quarter of 2023.

“The efforts made by the Milei administration — which is committed to a rapid fiscal adjustment in 2024, resulting in a balanced budget — are going in the right direction,” comments Sergio Armella, a Goldman Sachs analyst, in a note to investors. However, the US investment bank warns that the “implementation [of new fiscal policy] remains critical and challenging.” For its part, Citibank — another American financial giant — highlights that “Argentina continues to [search for] macroeconomic stabilization,” although there are “positive signs” of this being achieved. At the same time, Citibank analysts affirm that Argentine banks have proven resilient despite the complex local regulations. Such an assessment — in the context of a country with a turbulent economic history — dispels the fears of a new financial crisis, like the one suffered in 2001, when Argentina’s financial system collapsed.

Milei’s administration is also trying to woo investors on the basis of its ability to tame inflation. Prices rose by 11% in March of this year compared to February, positioning Argentina as the country with the highest inflation worldwide, leaving behind other chronically ill nations, such as Lebanon and Venezuela. So far this year, the price variation already exceeds 51.6%. However, what would be considered chaos in another country is seen as positive in Buenos Aires: the data marks a sharp decline from the maximum monthly inflation — 25.5% — that was registered in December of 2023, under the economic policies of the previous administration.

According to the Central Bank of Argentina, it’s expected that, in 2024, inflation will be limited to 189.4% year-over-year… still extremely high, but more than 20 points lower than the record that was hit in 2023. “We’re going through the most acute phase of the inflationary process. This will slow down due to the combination of fiscal and monetary [adjustments],” notes a recent report published by BBVA Research about the situation in Argentina.

Any event — such as the ongoing dengue crisis — can reveal yet another fragile flank of the Argentine economy. The outbreak of the disease exemplifies the international isolation that the South American country suffers from. Buenos Aires has faced obstacles regarding the importation of repellents, or the supplies needed to make them. Insecticides have disappeared from all supermarkets and pharmacies in the country’s main cities (dengue is primarily transmitted from person to person via mosquito bites). This has forced the administration to lift all obstacles to the arrival of repellent-related products from other countries, while exempting them from tariffs and sales taxes. In 2023, the local economy was one of the most protectionist in Latin America, with a mere 0.25% share in global import trade — the lowest rate in history — according to the Economic Research Institute of the Córdoba Stock Exchange. “The country remains in an environment of critical stagflation: that is, without growth and with inflation going through the roof,” summarizes Luca Sibani, the director of discretionary strategies at Epsilon Capital.

Debt

Beyond the macroeconomic indicators, Argentina’s Ministry of Economy — led by Luis Caputo, the former strongman of JP Morgan and Deutsche Bank in the region — is making efforts at the local level to showcase the success of his government’s plan to international investors. He emphasizes the rally in Argentina’s sovereign debt bonds (held in US dollars), with an increase of up to 50% so far this year. A single bond — consisting of public debt, issued in foreign currencies — is already trading at about $60, which is more than triple what it was when it hit its low in 2022, when the bond sank to $19. This places Argentine debt as one of the best performing among emerging markets.

“However, it’s still difficult to trade Argentine bonds, because the risk is still very high,” Sibani cautions. This is evident upon looking at the local risk premium, which — although it remains at its lowest level in the last five years — is still double the low levels it reached during the conservative administration of Mauricio Macri between 2015 and 2019.

“All the headlines drive bond prices [up],” says Laura Reardon, a fixed income portfolio manager at Columbia Threadneedle Investments. She calls for deeper analysis while evaluating Argentina’s dollar bonds. Among the factors that stand out, she notes, is “the political noise, which has enormous weight.”

The current tension isn’t minor: the far-right ruling party doesn’t have a majority in the National Congress, nor does it govern in any of the 24 provinces that make up the country. In February, Milei’s legislative weakness was particularly evident, with the rejection of his omnibus bill, which included a variety of measures to gut the state apparatus. This initiative sought to give a nod to the markets, with the privatization of public companies and changes to the pension system.

The true test regarding Argentina’s debt is tied to the ongoing negotiations with the IMF. The multilateral organization approved an additional disbursement of $4.7 billion at the end of January, which covered almost all debt repayments until April. The government claimed that this package didn’t consist of new aid, but rather was part of a 2022 plan negotiated by the previous center-left administration. However, Milei is currently seeking a $15 billion loan from the IMF, which would boost foreign reserves and allow his government to begin dismantling Argentina’s complex system of currency restrictions. This would be the first step towards Milei’s main promise — dollarization — or, at least, towards a removal of restrictions on the purchase of foreign currency in daily life.

For now, the IMF’s latest findings — published just a few days ago — appear to give the government some respite. Although the fall in GDP could reach 2.8% in 2024, the calculations made by the organization — which is led by Kristalina Georgieva, a Bulgarian economist — highlight that Argentina’s gross public debt will be reduced by 45 points in 2024, falling from 154% of GDP to 86% by the end of the year. Washington’s expectations are very positive: IMF analysts even point out that the debt-to-GDP ratio could sink to 47% by 2029.

“The debt levels aren’t worrying, not even in relation to GDP,” opines Santiago Batista, executive director of the ICiudad Institute, a Buenos Aires-based think tank. “Argentina’s problem is always between now and the next three years. The opportunities [that will be available] over the next 100 years are similar to the Swiss economy… but the problem is always the [short to mid-term] situation,” he adds. The figures support his perspective: in January of next year alone, Milei’s government has to pay a lump sum of $7 billion to creditors as certain debts reach maturity.

“Our basic hypothesis is that some type of restructuring will be required,” says Reardon, who highlights the importance of delaying payments that are coming due next year. In this line of thinking, a memo from Citibank is confident about Argentina’s chances of being granted a “soft restructuring” of debt by next year, with “a new default scenario being unlikely. This confidence is due Mieli’s economic team, which seeks to [show off Argentina] as being investor-friendly.” The US bank goes on to suggest that the final repayment of debt instruments could be postponed “into the next decade.”

Despite the bullish attitude of the financial markets when it comes to Argentina, there are objectors. For instance, Oxford Economics — a leader in global economic forecasting — maintains a 75% probability that Argentina will default on its sizable debts again between 2025 and 2027, which will imply far tougher renegotiations with investors. “We expect that the fiscal adjustment [being implemented through various policies] in Argentina will fail in 2025,” states the latest report published by the consulting firm.

Several other major economic consultancies emphasize that there’s still a long way to go before Milei’s administration can issue new debt in international markets, convulsed by the two major global armed conflicts that are altering the plans of the great powers: the invasion of Ukraine and the war on Gaza. Furthermore, the presidential elections in the United States — scheduled for November of this year — add another factor of doubt for market stability.

Unforeseen events

Argentina’s official roadmap — which still hasn’t been announced publicly — doesn’t mean that unforeseen events cannot arise. The lawsuits that the South American country is embroiled in abroad can generate new headaches for the administration. For instance, there’s a pending case against Buenos Aires for the 2012 expropriation of the energy company YPF: this past September, a US judge ruled that Argentina must pay $16 billion to minority shareholders who lost their stakes.

Mieli’s administration is betting on delaying the legal process, although this has a daily cost of $2.5 million dollars in interest (as highlighted a few weeks ago by the local press). The figure is already closing in on $500 million. And, at the moment, the lawyers representing the plaintiffs in the YPF case have their eyes on the seizable assets that the Argentine state has abroad, from Aerolíneas Argentinas planes to satellites owned by the public telecommunications company.

Despite the good data that Milei’s administration is trying to highlight for the sake of foreign investors, Argentina’s economic activity remains stagnant. According to the latest data for February, the nation’s total industrial production has fallen by 9.9% year-over-year. Meanwhile, 50.6% of firms expect that demand will continue to contract. The greatest variation was recorded in the construction sector, which has seen its activity decline by 24.6% compared to the previous year. Construction has strongly been affected by the government slashing spending on public works and infrastructure development.

The big question — which all the parties can agree on — is about how the government will combine its economic plan with the electoral calendar: the next legislative elections will take place in 18 months.

“The question is always the same: how tolerant will people be in the face of a new structural adjustment?” concludes Santiago Batista, from his think tank in Buenos Aires. For now, the arrival of winter will force the mosquitoes to retreat, at least calming the public health crisis.

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