Bullish on Argentina?

There’s a modified version of Borges’ famous quote about the Argentines that must no doubt be painful for some Argentines to hear which goes: "The Argentinians are Italians who speak Spanish; pretend they have American salaries and would like to live as the English, quote the French but vote like the Senegalese, think like leftists but live like burgeois, praise the Canadian entrepreneurship but have a Bolivian organization, love the Swiss order but practice the Iraqi disorder”.

The late German MIT economist Rudi Dornbusch (who came up with a plan for Argentina after their 2001 disaster) used to tell his students in the 1980s that there are four kinds of countries: rich, poor, Japan, and Argentina (per Andres Velasco, Dean of Public Policy of London School of Economics). Argentina is like one of tennis’ bigger underachievers, Argentine David Nalbandian.

Argentines have long been used to suffering. Argentina is among the top handful of countries to have suffered through the most economic recessions of any country in the world, sitting comfortably next to poor countries which have suffered through protracted civil wars (Libya, Syria, Chad and Congo). So In 2001 the Argentine government stopped payment on more than $100 billion in debt, the world's biggest-ever sovereign default. The deep economic crisis that ensued stemmed from the decade-old convertibility plan (where the Argentine peso was fixed 1:1 to the US dollar in an effort to control inflation) which came to an end and pushed Argentina in a deep hole as she was cut off from international credit markets. A year-long banking holiday known as the ‘Corralito’ followed. The fall out from 2001 was especially painful given the large informal economy, unleashing deep social wounds.

According to historian and political commentator Carlos Pagni, it is important to maintain focus on the watershed 2001 tragedy because ‘from there we see phenomenons that persist today’.

So it is sadly no surprise that you’ll hear local big name political analysts lament that everything invariably ends up badly in Argentina. Locals lamenting that the country is rotten to the core. Or anti-Peronists observing that the Argentines enjoy having their blood sucked dry.

These days Argentina is once again making international headlines left and right. The attention on Argentina is attributable to Milei, the radical libertarian economist who came to power in late 2023, who likens the state to a pedophile in a nursery school. He openly expresses his disdain for big government, spoke of bombing the central bank and called Mercosur (the South American trade treaty) a prison.

Argentina under Milei has earned a spot in economics books. He made the cover of the June 10, 2024 issue of Time magazine. The British paper, the Financial Times had criticized Milei’s economic policy for being contradictory around when he took office. The Financial Times noted that after interviewing major political and economic advisory firms and consultants, the majority had predicted that the Milei presidency would come to an end in less than a year, triggering social chaos, deepening Argentina’s recession and forcing an early election. The British paper changed course in December 2024 noting that Milei may have proved his critics wrong.

Nowadays it seems that Milei is receiving much more praise and recognition outside Argentina rather than locally. He inherited a country that was on the brink of hyperinflation and total chaos. Argentina was suffering from the third highest rate of inflation in the world, behind Venezuela and Lebanon. Inflation accelerated as a result of a number of factors, among them the implementation of the “Soybean Dollar” at the end of 2022 and the unrestrained printing of pesos by the Argentine Central Bank, characteristic of the fiscal policy of the Peronist government. Some political analysts accuse him of only focusing on inflation, which he has labelled the worst tax of all. Even though it is forecasted that annual inflation will be in the range of 200% for 2024, it is expected to be below 40%-50% for 2025 (Price Waterhous Coopers).

How did he achieve such a major milestone? largely by (1) eliminating government deficit spending. Public spending was reduced by a third. He reduced government ministries from 18 to 8.The phrase he was repeated as saying, "No hay plata" ("There is no money"), mutated into a YouTube classic; and (2) successfully implementing a no printing policy at the Central Bank (when more bills are circulating in the economy it drops the value of the bills already floating around).

On top of that he secured funding for Argentina’s 2025 debt obligations and so has finally taken Argentina out of the desperate state it had negotiated from when seeking credit to manage its debt. The country’s international credit risk rating improved drastically.

Foreign investors are anxiously waiting to see what will happen with the crawling currency peg and foreign exchange controls that have been in place to control capital flight. More on that to come potentially in the future.

Analysts seem to agree that exports from the energy sector would be the new gamechanger that can generate enough dollars in the future so that the outflow of foreign exchange does not compromise Argentina’s books.

Milei’s finance minister is from a finance background as opposed to public administration or academic background. Like Trump’s choice. While his party, La Libertad Avanza, has a small minority in Congress (15% of the Chamber of Deputies and 10% of the Chamber of Senators) with a once again highly divided political opposition, he managed to successfully push through radical reforms.

The world is watching to see if he can successfully implement major structural reforms that can help Argentina break away from its protectionist policies that have hindered foreign direct investment. Argentina is ranked 126 among 190 economies per the World Bank’s ease of doing business index, according to the latest annual ratings. The index ranks countries against each other based on the extent to which the regulatory environment is conducive to business operations and the strength of protections of property rights.

Milei’s popularity remains relatively high in spite of the pain that his reforms have inflicted on the population. Contradictory reports have come out regarding poverty rates. A recent report by the University of Torcuato Di Tella (UTDT) and based on survey findings by the National Institute of Statistics and Census (INDEC) shows that poverty rates fell to 36,8% in the last quarter of 2024.

Food for thought:

The XIX century French economist, Bastiat wrote ‘The State’ during the French Revolution of 1848, when socialist governments made promises to French citizens and observes:

“The state is that great fiction by which everyone tries to live at the expense of everyone else.”

“The state is subject to the Malthusian law, which states that it tends to expand beyond its means.”