Argentina is experiencing a moment of unprecedented financial optimism in recent years. Since coming to power, President Javier Milei has implemented a series of fiscal policies that are reconfiguring the country’s finances. Thanks to its “budgetary anchor”, based on a strict spending policy and the achievement of budget surpluses, Argentina’s country risk fell below 1,000 pointsa level not seen since August 2019. This improvement occurred just as monthly inflation in Argentina moderated significantly, reaching the lowest level in almost three years.
Milei’s plan, supported by deregulation policies and measures to attract international investment, generates a positive short-term impact on the financial system. Kimberley Sperrfechter, emerging markets economist at Capital Economics, said “investor sentiment towards Argentina has improved significantly in recent months.” The expert adds that, thanks to these improvements, “the government will probably be able to meet the sovereign debt payments that will come due next year.” However, it also warns that underlying challenges remain to ensure a sustainable recovery.
“One of the reasons for this improvement is the impressive progress made by President Milei in his stabilization program. Inflation fell significantly, reaching 3.3% per month in Septemberthe lowest rate since the end of 2021. Argentina’s balance sheets have improved significantly thanks to a rigorous fiscal adjustment: the government recorded a primary surplus for the ninth consecutive month in September, bringing it to 1.4% of GDP over a period of twelve months. , while the current account balance has become positive again,” explains the Capital Economics expert in a note to clients.
Inflation is also slowing
“Core inflation stood at 3.3% per month (198% annualized), slowing for the first time since May. This constitutes an encouraging sign regarding the ongoing inflationary process,” says a report from BBVA Research. This data was well received in financial markets, where the price of Argentine bonds rose and optimism for the country’s economy increased significantly.
Milei promoted the balance of public accounts, allowing the country to accumulate budget surpluses month after month. According to official data, the primary surplus reached 899.66 billion pesos in August, compared to the deficit recorded in the same month of 2023. This situation not only allows the State to withdraw the monetary base from the economy, but also increases investor confidence in the country’s ability to honor its financial commitments. “Since 2010, no financial surplus has accumulated during the first eight months of the year.”underlined sources from the Ministry of the Economy.
Argentina’s Great Fiscal Adjustment
The budgetary adjustment implemented by Milei was not simple and had consequences on the real economy, which is still in the recovery phase. “The Argentine economy continues to suffer intensely from this policy, but the budgetary adjustment is producing results in the financial area,” they ensure Bloomberg. The reduction in monthly inflation, which fell below 4% for the first time, was seen as a significant victory, while Central Bank economists expect annual inflation to fall to 123 .6% by the end of 2024.
Additionally, government policies aimed at improving dollar liquidity, such as the asset regularization regime, have also had positive effects. This measure allows Argentines to declare their assets both in the country and abroad and has enabled the repatriation of more than 13 billion dollars, thus helping to improve exchange stability.
Milei’s commitment
“The government has given clear signals that it is prepared to honor international bond payments due next year.“, said Sperrfechter. To this end, the government worked on a repurchase agreement with international banks and renewed its swap line with the People’s Bank of China, which should cover the financing needs for immediate payments.
However, experts warn that this progress still does not solve one of the deepest structural problems in Argentina’s economy: the peso is still overvalued. This keeps Argentina’s external competitiveness in a fragile position and continues to put pressure on the balance of payments, even as growth in oil and gas exports allows Argentina to achieve several trade surpluses. “The absence of devaluation makes it difficult to envisage a sustainable return to economic growth, while the government continues to rely on fiscal policy to reduce demand for imports and protect its reserves,” he said. added. Sperrfechter.
Medium-term risks
Despite short-term successes, the medium- and long-term outlook is not without risks. Popular support for adjustment measures is beginning to fade, particularly with rising unemployment and the fact that more than half the population lives in poverty. The upcoming midterm elections could test Milei’s commitment to fiscal discipline, and any changes in fiscal policy could jeopardize the progress made so far.
In summary, Milei’s “financial revolution” in Argentina is reversing mistrust of markets and reducing the country’s risk to levels not seen in years.. Remember that just a few months ago, country risk was still above 2,000 points. The shock policies of the Argentine government have produced this miracle which, on the other hand, is eroding the country’s real economy in the short term.
However, “although short-term default risks have decreased significantly, we still see that repaying large debts remains a daunting task,” Sperrfechter concludes. Argentina’s economy appears to have stabilized financially, but the need to resolve structural issues remains.
