Argentina is experiencing a moment of financial optimism unprecedented in recent years. Since taking power, President Javier Milei has implemented a series of fiscal policies that are reconfiguring the country’s finances. Thanks to its ‘fiscal anchor’, based on a strict spending policy and the achievement of fiscal surpluses, Argentina’s country risk has fallen below 1,000 pointsa level that has not been seen since August 2019. This improvement has occurred at the same time that monthly inflation in Argentina has moderated significantly, reaching the lowest level in almost three years.
Milei’s plan, supported by deregulation policies and measures that seek to attract international investment, is generating a positive impact in the short term on the financial system. Kimberley Sperrfechter, emerging markets economist at Capital Economics, said that “investor sentiment towards Argentina has improved significantly in recent months.” The expert adds that, due to these improvements, “the government will probably be able to meet the sovereign debt payments that come due next year.” However, it also warns that underlying challenges persist to ensure a sustainable recovery.
“One of the reasons for this improvement is the impressive progress that President Milei has made with his stabilization program. Inflation has fallen drastically, reaching 3.3% monthly in Septemberthe lowest rate since the end of 2021. Argentina’s balance sheets have improved dramatically thanks to a rigorous fiscal adjustment: the government ran a primary surplus for the ninth consecutive month in September, bringing it to 1.4% of GDP in a period of twelve months, while the current account balance has returned to being positive,” says the Capital Economics expert in a note for clients.
Inflation also cools
“Core inflation stood at 3.3% monthly (198% annualized), slowing for the first time since May. This constitutes an encouraging sign regarding the ongoing inflationary process,” said a BBVA Research report. This data has been well received in the financial markets, where the price of Argentine bonds has increased and optimism for the country’s economy has grown considerably.
Milei has promoted the balance of public accounts, causing the country to accumulate fiscal 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 confidence of investors on the country’s ability to meet its financial commitments. “Since 2010, a financial surplus has not accumulated in the first eight months of the year.”highlighted sources from the Ministry of Economy.
Argentina’s great fiscal adjustment
The fiscal adjustment implemented by Milei has not been simple and has had consequences for the real economy, which is still in the recovery phase. “The Argentine economy continues to suffer intensely from this policy, but the fiscal adjustment is generating results in the financial sphere,” they assure from Bloomberg. The reduction in monthly inflation, which for the first time has fallen below 4%, has been seen as a significant victory, while Central Bank economists expect annual inflation to fall to 123.6% by the end of 2024.
In addition, government policies to improve dollar liquidity, such as the Asset Regularization Regime, have also had positive effects. This measure allows Argentines to declare assets both in the country and abroad and has led to the repatriation of more than 13 billion dollars, contributing to improving exchange stability.
Milei’s commitment
“The government has given clear signals that it is willing to meet international bond payments due next year.“said Sperrfechter. To this end, the government has worked on a repurchase agreement with international banks and has renewed its swap line with the People’s Bank of China, which should cover financing needs for immediate payments.
However, experts warn that these achievements still do not address one of the deepest structural problems of the Argentine 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, although growth in oil and gas exports is allowing Argentina to achieve several trade surpluses. “The lack of a devaluation makes it difficult to think of 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 added. Sperrfechter.
Medium-term risks
Despite the short-term successes, the medium and long-term outlook is not without risks. Popular support for adjustment measures is beginning to fade, especially with the increase in unemployment and more than half of the population living in poverty. The upcoming midterm elections could test Milei’s commitment to fiscal discipline, and any change in fiscal policy could jeopardize the progress made so far.
In summary, The ‘financial revolution’ that Milei has carried out in Argentina is managing to reverse the distrust of the markets and reduce the country’s risk to levels not seen for years. It is worth remembering that just a few months ago, the country risk was still above 2,000 points. The shock policies of the Argentine government have worked this miracle that, on the other hand, are eroding the country’s real economy in the short term.
However, “although short-term default risks have decreased considerably, we still see that meeting large debt payments remains an arduous task,” concludes Sperrfechter. The Argentine economy appears to have stabilized financially, but the need to address structural problems remains.
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