A seismic change is underway in Argentina. President Javier Milei’s ascent to the country’s highest office marks a significant shift in the country’s political landscape. His election was largely seen as a widespread rejection of Peronism and the cronyism that had plagued previous administrations. Can Milei succeed in changing Argentina’s fortunes? And what are the risks and opportunities? Find out here.

A breath of fresh air?

Milei is known for his unconventional style and often politically incorrect rhetoric. He used social media effectively during his campaign to position himself as an outsider capable of enacting real change. He was frequently seen brandishing his trademark chainsaw at rallies. This was a powerful, if unsubtle, symbol of his intention to drastically cut government spending and the size of the state.

Promises versus achievements

Upon assuming power, President Milei made several ambitious promises aimed at revitalising Argentina’s economy. These included eliminating the fiscal deficit, reducing inflation, and cutting bureaucratic red tape. He also vowed to minimise disruptive street protests. These measures were designed to create a more favourable environment for private sector-led growth. As part of this drive, Milei reintroduced a pro-market economic team in the Ministry of Finance and the central bank, many of whom served during President Macri’s term. This move signals a return to policies that prioritise market-friendly reforms.

How’s he done so far? By aggressively cutting spending and chopping government ministries in half, Argentina has swung from a fiscal deficit of 2 trillion pesos (US$2 billion) at the end of last year to a surplus of 264.9 billion pesos (US$264.9 million) in April 2024. This is the first fiscal surplus in 16 years [1]. The annual inflation rate remains high at an eyewatering 236.7% y/y. That said, the month-on-month rate is on a downward trajectory, currently at 4.2% in August 2024 [2].

Opportunities and risks

Foreign exchange and reserves policy

One of the most pressing challenges facing Milei’s administration is managing foreign exchange reserves. Building reserves has proven difficult, which has meant uncertain timeline for relaxing capital controls. The black market exchange rate is currently 30% higher than the official rate [3]. Authorities are understandably keen to narrow this gap before implementing any policy changes. This discrepancy poses a significant risk to economic stability and investor confidence.

Relationship with the IMF

Maintaining a stable relationship with the International Monetary Fund (IMF) is crucial for Argentina’s economic fortunes. The country faces large external debt payments of approximately US$9 billion in 2025. Navigating these obligations will require careful fiscal management and continued support from international financial institutions. Progress has been mixed. In May 2024, authorities reached another preliminary agreement with the IMF on the reforms the country will implement to receive financial aid. However, relations soured somewhat after the IMF pulled its top negotiators amid an ongoing feud with Milei.

Currency and debt management

It remains uncertain whether the government’s current approach to managing the currency is sustainable. By not allowing the currency to adjust to its true market level, there’s a risk of exacerbating economic imbalances. The authorities are banking on accumulating sufficient foreign currency reserves over the next 6-12 months to address currency stabilisation and external debt repayments.

To achieve this, it will be crucial for the government to maintain public confidence in its plans. Building reserves will also be exposed to the vagaries of commodity prices, international trade and foreign investor inflows. A balanced and well-communicated economic strategy will therefore be key.

Midterm elections and Vaca Muerta oil field

The midterm elections in 2025 will be a critical juncture for Milei’s administration. The result could potentially reshape the political landscape and derail economic policy. As of September 2024, Milei’s popularity stood at 53% [4]. A slight drop from the start of his term but not disastrous.

On a more positive note, the Vaca Muerta oil field represents a major medium-term opportunity for Argentina. It is one of the world’s largest unconventional hydrocarbon resources, with an estimated 16 billion barrels of oil and 308 trillion cubic feet of natural gas. Substantial investment is already flowing into the sector, which should help boost economic growth and secure energy independence [5].

Final thoughts…

It’s been an eventful year for President Milei. On the positive side, inflation is down and, as promised, he’s cut the size of government. However, he’s yet to deliver the broad transformation he promised. Significant challenges remain around foreign reserves and growth. His skill as a political negotiator will continue to be tested on the domestic and intentional stage. Only time will tell if his bold measures lead to lasting change.