It has been a little over a year since Javier Milei arrived at the Casa Rosada. His groundbreaking, daring and sincere speech (he won the elections by admitting that he was going to put Argentina in a deep crisis in the short term) conquered some desperate Argentines after decades of ineffective governments that have ‘destroyed’ the economy of what was one of the richest countries in the world 70 years ago. Today, Milei enjoys more popularity than the day she won the elections. The key, probably, is that he has done what he said he was going to do and on top of that it is working. Inflation has cooled much faster than expected, the public deficit has disappeared and the country’s risk has fallen to levels not seen in years. Finally, the economy is showing signs of recovery, but GDP confirmation is still missing.
In a shorter period of time than had been initially estimated, the measures implemented by the Milei Government have begun to show positive results in key indicators such as inflation, fiscal balance, country risk or the energy balance (the latter has been quite surprising), according to a report published this week by experts at JP Morgan. “The administration did not hesitate to carry out a deep fiscal adjustment from the beginning… We have insisted for years that it was the main macroeconomic problem, the genesis of the Great Stagflation that the country suffered for years (if not decades), as a result of the chronic fiscal deficit. The current administration aligned itself with this idea and did not hesitate to correct the deficit, even with the social and activity costs associated with the adjustment. The results are clear,” the report states.
“The Phoenix is unleashed”
One of the greatest achievements of this period has been the notable reduction of the fiscal deficit. According to JP Morgan, the primary deficit of 1.5% of GDP recorded in 2023 was transformed into a surplus of 1.7% of GDP in 2024. “The balance sheet (including interest payments and the quasi-fiscal deficit attributed to the central bank already shows a balanced budget, compared to a deficit of 4.4% of GDP at the end of 2023,” highlights the report. This effort has laid the foundations for greater long-term fiscal sustainability. The agency Fitch, for example, has already upgraded Argentina’s debt rating.
The American bank’s forecasts are optimistic and all this optimism is shown in a single sentence: “The phoenix is unleashed”, referring to credit and demand in pesos, which against all odds have awakened. “The focus here is on the evolution of real demand for pesos through credit performance and secondary monetary creation, and how this impacts monetary aggregates. First and foremost, the real demand for pesos is increasing. “The main barometer that helps defend this statement has been the evolution of real credit in local currency, which is advancing at a pace not seen in the last 15 years.”
The miracle of inflation
Furthermore, inflation has shown a marked slowdown. In October, The Consumer Price Index (CPI) registered a monthly increase of 2.7%the lowest since 2020. “If monthly inflation remains close to 2.5% in the coming months, the government plans to reduce the peso devaluation rate to 1%,” notes JP Morgan. Projections point to annual inflation of 120% in 2024, but with a sharp drop to 25% by the end of 2025. All of the above is allowing Argentine bonds to rise in price (interest drops) and country risk to plummet. (equivalent to the risk premium in Spain).
The country risk has gone from exceeding 2,100 points in January of this year to now standing at 750 (it has even fallen below 700). Little by little, Argentine debt is approaching sustainability, which removes the specter of default. This, together with the recovery of activity, may end up putting the ‘icing’ on the cake for 2024.
Economic growth, after suffering a severe contraction in the first half of 2024, is beginning to awaken. GDP could already be growing by 8.5% annualized at the moment, as revealed by JP Morganalthough for 2024 as a whole it foresees a more modest expansion that could be 4.4% by 2025. “The lowest point of the economic cycle is behind us, and high-frequency indicators suggest a sustained expansion for next year,” highlights the analysis.
Another positive point has been the improvement in international reserves. Although net reserves remain negative, gross reserves have increased significantly thanks to private sector inflows and measures such as tax amnesty. “Private deposits in foreign currency have grown by 15 billion dollars since August, reaching a record level of 34 billion,” the report states. This increase has strengthened the credibility of the financial system and helped stabilize the exchange rate.
The Government is moving forward at a safe pace.
On the legislative front, Milei’s government has made progress despite having limited representation in Congress. Deregulations have been approved in almost all sectors (rentals, airlines…), laws to promote uncertainty and legal certainty (which encourage investment) and key fiscal measures, while the Executive has used decrees to maintain control over economic policies. “Management has demonstrated its ability to handle initial difficulties and continue making progress toward its objectives,” says JP Morgan.
Furthermore, JP Morgan experts comment that the first year of Milei’s administration has witnessed notable progress in terms of stability. The policy objectives for 2025 are clear. “To lay the foundation for sustainable growth in the future, the country needs to lift capital controls and have market access before the end of the year… A gradual release of capital controls, in our view, will help accelerate economic growth, as well as the disinflationary trend. Capital inflows, favored by the RIGI framework (gives stability and encourages investments) and proximity to the new US administration, may prove to be a more relevant source of foreign exchange reserves than the current account surplus,” they say from JP Morgan. However, the current account will also support.
Projections for 2025 seem positive. The surplus is expected to increase to $6.5 billion, driven by growth in energy exports (Vaca Muerta oil and gas) and the elimination of exchange regulation schemes. “With conservative assumptions, such as a foreign direct investment of 2.5 billion dollars, we can foresee a net accumulation of reserves of 3.6 billion for next year,” the report adds.
Looking ahead, the report emphasizes that the government must advance capital market liberalization. “The gradual release of capital controls will accelerate economic growth and disinflation,” says JP Morgan, although it recommends maintaining macroprudential measures to avoid financial instability.
Return to the markets
Another challenge will be the negotiation of a new agreement with the International Monetary Fund (IMF) to guarantee access to international markets and mitigate the risks of external debt from 2026. Despite these difficulties, JP Morgan maintains an optimistic approach . “Our constructive narrative has gained conviction: the administration has demonstrated its ability to handle initial difficulties and deliver results again,” he says.
In political terms, The legislative elections of 2025 will be crucial to consolidate the reforms. Milei currently has a 52% approval rating, which could help his coalition, La Libertad Avanza, increase its representation in Congress. “Greater legislative support would pave the way for broader structural reforms, such as changes to the labor and pension system,” the report highlights. The government’s long-term goal is to raise the national savings rate (with chronic surpluses) and foster sustainable growth, which could increase GDP per capita by 50% in the next decade. “The end of the chronic fiscal deficit, structural reforms and a more open economy are the fundamental pillars of this project,” concludes JP Morgan.
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