The Milei plan continues and, as far as the financial economy is concerned, it is generating a truly positive revolution that is reflected in the sovereign and private debt markets. The financial markets, through the decisions of investors, are causing Argentina’s country risk (called risk premium in Europe) to fall to levels not seen in years. The Milei plan, based on the liberalization of the most important sectors of the economy, the reduction of expenses and the attraction of international investments, surprises the markets. Even if the real economy continues to suffer intensely from this policy (this is the short-term cost), the financial economy is waking up more intensely than expected. The latest mechanisms implemented to continue the liberalization of the economy, as well as the good news coming from certain sectors, are driving up the price of Argentine bonds on the markets. It should also be remembered that the The CPI released for October showed that monthly inflation in Argentina had finally fallen below 4%which was received with great enthusiasm by investors.
“We have long been skeptical about Argentina’s ability to avoid a default in the coming years… However, Milei’s government has achieved much more than expected“, say economists at Oxford Economics in a note. Despite everything, these experts believe that great turbulence will arrive later, which could cause a reversal of the current upward trend in bond prices. However, for the moment, the risk premium collapsed, falling from almost 2,700 points to 870 points, a drop already close to 1,000 basis points.
All this is also happening against a backdrop of notable disinflation. The CPI released for September showed that monthly inflation in Argentina finally fell below 4%, which was greeted with great enthusiasm by investors. Argentina’s monthly inflation reached its lowest level since the end of 2021, representing a significant victory for President Javier Milei, who manages to end the price spiral relatively quickly, as the agency explains Bloomberg. Ending the price spiral by reducing public spending and achieving several budget surpluses is a strategy that has become the centerpiece of his administration.
Consumer prices stood at 3.5% in September compared to August, below the market consensus and economists polled by Bloombergwhich placed the CPI at 3.6%. Annual inflation has slowed to 209%, according to government data released last week. Inflation has hovered around 4% since May. This disinflation is raising great expectations in the markets, where country risk or risk premium has fallen sharply in recent days. Milei’s plan, in addition to balancing the accounts, provides for other tools such as tax amnesty to recover part of the dollar savings leaving the country or deregulation to facilitate foreign investments and offer greater flexibility to the Argentine economy.
All this allowed the central bank to lower interest rates. Argentina’s central bank cut its benchmark interest rate to 35% in a surprise move last Friday, boosting local markets and signaling the government’s growing optimism that it can bring the country’s triple-digit inflation under control.
The 500 basis point cut was the seventh time the policy rate had been cut since libertarian President Javier Milei took office in December, when it was 133%. Bond prices continued to rise after the news and the country risk index fell, according to the agency’s publication. Reuters.
From Oxford Economy explain that “after making a strong initial fiscal adjustment, the government focuses on reducing inflation through a controlled, slowly changing exchange rate. The exchange rate is depreciating at an annualized rate of 27%, significantly lower than recent inflation rates, which is generating an appreciation of the real exchange rate,” estimate these experts.
The Ministry of Deregulation
Meanwhile, the government of Javier Milei continues its plan of adjustments and liberalization of the sectors concerned. Although somewhat anecdotal, the government announced on Thursday that it would liberalize the market for landing services at Argentine airports in response to the union dispute that left some 2,000 people on board planes for several hours in Buenos Aires this Wednesday. On the orders of the Ministry of Transport, private companies will be able to enter this sector in order to “end the monopoly of (the public company) Intercargo”, reported the presidential spokesperson, Manuel Adorni, during a press conference .
“With this deregulation we are allowing new players to enter the Argentine market. We are allowing new companies, even if they are not airlines, to provide the service with authorization and automatic renewal,” confirmed the chief of Transport, Franco Mogetta, in the same conference. In Argentina, these tasks are carried out by the Ministry of Deregulation and Transformation.by Federico Sturzenegger, who qualified the announcement.
“This is part of a deregulation process that started last year with price deregulation, since we had regulations that prevented charging cheaper prices. (We deregulated) the roads, allowing much more airlines to fly freely across the country,” he said. expressed. At smaller airports, this measure will allow the site operator to define the ramp operation manual and allow the service to be provided by a local, non-airline-owning company.
Overall, Oxford Economics analysts believe that “Argentina’s survival next year is possible, but not without periods of financial stress.” Unless the adjustment program fails, we believe that IMF will help Argentina avoid default next year. However, the IMF will be reluctant to lend large sums given its already considerable exposure to a high-risk situation. Disbursements will be sufficient to avoid a short-term collapse, but not to validate current market prices,” these experts believe.
However, economists J.P. Morgan are more optimistic and believe that “US dollar liquid reserves will continue to recover thanks to further increases in US dollar deposit reserve requirements following the tax amnesty.” US dollar deposits have increased by $12.4 billion since mid-August… Therefore, we expect a further increase in reserve requirements for US dollar deposits after the Phase I deadline expires this week.
At Oxford Economics, they emphasize the most negative part: “We remain convinced that unless Argentina demonstrates phenomenal political discipline and inflation falls rapidly, financing conditions and market sentiment will deteriorate significantly next year. We update our fair value of the 2030 bond to 40 from the mid-30s over a nine-month horizon and take a very underweight position given market prices well above 50,” say these experts who have always defended the fact that Argentina would default have had to correct their forecasts and admit that there will be no default in 2025. Will it be the same in the years to come?
