The Milei plan continues and with regard to the financial economy it is generating a truly positive revolution that is reflected in the sovereign and private debt markets. The financial markets, through the decisions of investors, are causing Argentina’s country risk (known as risk premium in Europe) to fall to levels not seen for years. The Milei plan, based on the liberalization of the most important sectors of the economy, spending cuts and attracting international investment, is surprising the markets. Although the real economy continues to suffer intensely from this policy (it is the short-term cost), the financial economy is awakening more intensely than expected. The latest mechanisms implemented to continue liberalizing the economy, together with the good news coming from some sectors, are boosting the price of Argentine bonds in the markets. It is also worth remembering that the CPI published for the month of October showed that monthly inflation in Argentina had finally fallen below 4%which was received with great enthusiasm among investors.
“We have long been skeptical about Argentina’s ability to avoid a default in the coming years… However, the Milei government has achieved much more than we expected,” Oxford Economics economists say in a note. . Despite everything, these experts believe that great turbulence will come later, which could cause a reversal of the current upward trend in bond prices. However, for the moment the risk premium has collapsed, falling from almost 2,700 points to 870 points, a drop that is already close to 1,000 basis points.
All this also occurs in a context of notable disinflation. The CPI published for the month of September showed that monthly inflation in Argentina has finally fallen below 4%, which was welcomed with great enthusiasm among investors. Argentina’s monthly inflation reached the lowest level since the end of 2021, which represents a significant victory for President Javier Milei, who is managing to end the price spiral relatively quickly, as explained by the Bloomberg agency. Putting an end to the price spiral by cutting public spending, achieving several fiscal surpluses, is a strategy that has become a centerpiece of his administration.
Consumer prices stood at 3.5% in September compared to August, below what the market consensus and economists surveyed by Bloombergwhich placed the CPI at 3.6%. Annual inflation slowed to 209%, according to government data released last week. Inflation had hovered around 4% since May. This disinflation is generating great expectation in the markets, where the country risk or risk premium has fallen sharply in recent days. Milei’s plan, in addition to balancing the accounts, has some other tools such as tax amnesty to recover part of the savings in dollars that have gone outside the country or deregulation to facilitate foreign investment and provide greater flexibility to the Argentine economy.
All this has allowed the central bank to lower interest rates. Argentina’s central bank cut its benchmark interest rate to 35% in a surprise decision last Friday, boosting local markets and signaling growing optimism by the government that it can rein in the country’s triple-digit inflation.
The 500 basis point cut was the seventh time the policy rate was reduced since Libertarian President Javier Milei took office in December, when it was at 133%. Bond prices have not stopped rising after the news and the country risk index fell.
From Oxford Economics explain that “after having made a strong initial fiscal adjustment, the government is focused on reducing inflation through a controlled exchange rate that moves slowly. The exchange rate is depreciating at an annualized rate of 27%, significantly by below recent inflation rates, which is generating an appreciation of the real exchange rate,” these experts say.
The Ministry of Deregulation
Meanwhile, the Government of Javier Milei continues with its plan of adjustments and liberalization of relevant sectors. Although it is somewhat anecdotal, the Government announced this Thursday that it will liberalize the ramp service market at Argentine airports in response to the union conflict that left some 2,000 people inside the planes for several hours in Buenos Aires this Wednesday. By order of the Ministry of Transportation, private companies will be able to enter this business in order to “end the monopoly of (the state-owned) Intercargo,” reported the presidential spokesperson, Manuel Adorni, at a press conference.
“With this deregulation we are allowing new actors to join the Argentine market. We are authorizing new companies, even if they are not airlines, to provide the service with authorization and automatic renewal,” confirmed the head of Transportation, Franco Mogetta, in the same conference. In Argentina, these tasks are carried out by the Ministry of Deregulation and Transformationby Federico Sturzenegger, who qualified the announcement.
“This is part of a deregulation process that began last year with a deregulation of prices, since we had a regulation that prevented charging cheaper. (We deregulated) routes, enabling the possibility that many more airlines can fly freely through the country “, he expressed. In smaller airports, this measure will allow the site operator to define the manual for using the ramps and will allow the service to be provided by a local company that does not own airlines.
All in all, analysts at Oxford Economics believe that “Argentina’s survival next year is possible, but not without periods of financial stress. Unless the adjustment program fails, we believe that The IMF will help Argentina avoid a default next year. However, the IMF will be reluctant to lend large amounts given its already considerable exposure to a high-risk situation. The disbursements will be enough to avoid a short-term collapse, but not to validate current market prices,” these experts say.
However, economists JP Morgan are more optimistic and believe that “liquid US dollar reserves will continue to recover thanks to further increases in US dollar deposit reserve requirements as a result of the tax amnesty. In fact, it is worth noting that US dollar deposits increased by US$12.4 billion since mid-August… Therefore, we expect a further increase in US dollar deposit reserve requirements following the expiration of the Stage I deadline this week.
At Oxford Economics they insist on the most negative part: “We continue to believe that unless Argentina shows phenomenal political discipline and inflation falls rapidly, financing conditions and market sentiment will worsen markedly next year. We update our fair value of the 2030 bond to 40 from mid-30s over a nine-month horizon and assume a very underweight position given market prices well above 50,” say these experts who have always defended that Argentina would default. Now they have had to correct their forecasts and admit that there will be no default in 2025. Will the same happen in the coming years?
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