The Milei plan continues to bear fruit, at least as far as the financial economy is concerned. 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 reducing spending, deregulation and attracting 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 last factor that pushed up the price of Argentine bonds on the markets was inflation. The CPI released last Friday showed that monthly inflation in Argentina finally fell below 4%which was received 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 explained by the agency Bloomberg. Ending the price spiral by reducing public spending and achieving multiple budget surpluses is a strategy that has become the centerpiece of his administration.
Consumer prices stood at 3.5% in September compared to August, lower than expected by market consensus and by economists surveyed 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.
“Core inflation stood at 3.3% month-on-month (198% annualized), slowing for the first time since May. This constitutes an encouraging sign regarding the ongoing inflationary process, because it indicates that 70% of the components which explain inflation are returning to a downward trajectory,” they point out. Search BBVA.
High-frequency price indicators managed by the Spanish bank also show signs of slowing during the first weeks of October. “We therefore expect inflation to continue on this downward path in the coming months, even if upcoming adjustments to regulated prices impose some brake on the pace of disinflation, as does the current recovery in real wages” , warns the bank.
“Inflation has been quite stable throughout the country and the underlying CPI has moderated, which is a positive fact that obviously exceeds the 4% mark,” said María Castiglioni, director of the inflation company. counsel C&T Asesores in Buenos Aires, in statements to Bloomberg. In September, Milei reduced the country’s main import tax from 17.5% to 7.5%, while the gap between the official exchange rate and the parallel rate, which also affects prices, widened. is narrowed. Milei announced that it would completely eliminate the import tax by the end of the year. Additionally, he insisted this week that capital controls and the peso’s monthly depreciation rate of 2 percent would remain in effect, which would also help contain inflation.
The risk premium falls sharply
Meanwhile, Milei continues to cut subsidies and freeze other benefits. From Bloomberg Milei is expected to continue to gain ground on inflation, as economists forecast annual inflation to fall sharply to 40.9% over the next 12 months, according to a monthly survey by the country’s central bank. The central bank’s survey released on October 4 shows that economists expect annual inflation to fall to 123.6% by the end of 2024. All this is reflected in the risk premium, which is falling sharply to reach an unprecedented four-year low.
Javier Milei is carrying out a real revolution in Argentina’s public finances, which is already clearly reflected in the country’s risk premium (the differential between 10-year Argentinian bonds and those of the United States). The Argentine president bases his policy on balanced budget accounts. The “tax anchor” created by the Milei government This is the most important asset to regain market confidence, stabilize the peso, defeat inflation and return Argentina to the path of healthy and sustainable growth (without imbalances or money printing).
Last August, Argentina managed to chain eight consecutive months with a primary budget surplus and return to the positive balance of the financial result, thanks to the severe adjustment plan launched by President Javier Milei. The country recorded a primary budget surplus of 899.660 million pesos ($914.7 million) in August, compared to a negative result of 36.964 million pesos for the same month of 2023, official sources reported on Thursday.
Argentina’s primary surplus
During the first eight months of the year, Argentina managed to accumulate a primary surplus of 8.7 trillion pesos, compared to a deficit in the same period of 2023 of 2.2 trillion pesos.. The financial surplus accumulated during the first eight months of the year amounts to 1.9 trillion pesos, compared to a negative balance of 4.3 trillion pesos for the same period of 2023. During the first eight months of the year, the national public sector accumulates a primary surplus equivalent to 1.5% of GDP and a financial surplus of 0.4% of GDP, according to official sources.
“Since 2010, no financial surplus has accumulated during the first eight months of the year,” underline sources from the Ministry of the Economy. With these surpluses, we obtain two things: on the one hand, the monetary base is withdrawn from the economy, since the State becomes a saving agent (creditor). On the other hand, the surplus increases the confidence of agents in the peso and in the reliability of Argentina to repay its debts, which makes it possible to reduce the risk premium and opens the door for Argentina to be able to issue at new in the future. . public debt at a sustainable interest rate.
The change in trend observed this year is due to to the severe budgetary adjustment plan launched by Milei after his arrival at the Government last December. Since the start of the year, primary spending has seen a 30% reduction in real terms, according to the report. The problem is that this adjustment plan led to a recession from which Argentina is only just beginning to recover.
