Could Javier Milei bring Argentina's economy back to 'normal'?

Since independence in 1816, Argentina has defaulted on its sovereign debt nine times – most recently in 2020, says Caitlin McCabe in The Wall Street Journal. Now a “sea change” is under way as libertarian president Javier Milei delivers tough medicine to end chronic “political chaos, runaway prices and government overspending”.

Milei has laid off tens of thousands of civil servants and slashed red tape as part of “chainsaw budget-cutting” measures, says Craig Mellow in Barron’s. Inflation has fallen from 20% a month in late 2023 to 2% a month now, a big improvement in a nation prone to hyperinflation. To general surprise, “widespread strikes or riots” have been largely avoided, with many Argentines recognising the need for change.

Government bonds have responded with an “epic rally”, while the local Merval share index is up by two-thirds in a year. Argentina was kicked out of the benchmark MSCI Emerging Markets (EM) index in 2021 owing to restrictive currency controls. With Milei in liberalisation mode, speculation has grown that a return to EM status could be coming soon.

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An upgrade wouldn’t change much for the average investor. As Diego Celedon of JPMorgan notes, Argentine shares would account for just 0.2% of the overall EM index should they return. But it would be a game-changer for shares in Buenos Aires, sending almost $1 billion of funds pouring in from automatic buying by global funds that track the index.

A mid-term setback for Javier Milei?

Signs of discontent are growing, including a general strike earlier this month, says The Economist. While Milei remains popular, at 45% his approval rating has dipped recently as austerity bites.

Last year’s victories over inflation were achieved partly thanks to strict capital controls and a currency peg. Those rules deter foreign investors, while the peg was quickly consuming scarce central bank reserves. Thus to general surprise, last week Milei – flush with billions of dollars in cash from a fresh deal with the IMF – substantially eased currency rules.

The peso’s partial float is a high-risk move that could send inflation soaring ahead of midterm elections due in October, says Ciara Nugent in the Financial Times. The currency dropped 6% against the dollar in the first week of the float, less than expected and a sign that markets have confidence in Milei for now. With the left-wing Peronist opposition still widely blamed for economic woes, Milei may still be able to expand his tiny congressional minority later this year.

“Argentina’s history has been a non-stop” run of economic “malpractice”, says Juan Pablo Spinetto on Bloomberg. Now it has “the best shot in many years” to put a stop to chronic “overspending and money printing”. Long a cautionary tale in textbooks, Argentina might just be about to become a “normal” country.

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