Interested to hear the thoughts from various folks on this site (IB/HF/Econ) about how you see Argentina's future panning out over the next few years under Milei.
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Are there any precedents for radical dismantling of state services as he suggests? What about replacing the currency with a foreign one?
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How will Argentina's relationship within the region and with key trading partners change?
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What will it do for valuation of various asset classes: real estate, bonds, equities, etc.?
And maybe critically,
- Will Milei actually fulfill his campaign promises?
Ah, the future of Argentina, a topic as complex as a monkey's jungle gym! Let's swing through this together, shall we?
Precedents for radical dismantling of state services: There have been instances in history where countries have taken drastic measures to reform their economies. However, Argentina's situation is unique due to its history of economic instability and the extent of the proposed changes. Replacing the currency with a foreign one is a strategy known as dollarization, which has been used by countries like Ecuador and Zimbabwe to stabilize their economies. However, it's a double-edged sword, as it can also limit a country's monetary policy options.
Relationship within the region and with key trading partners: This is a bit of a crystal ball question. Changes could depend on the specific policies implemented and how they're received both domestically and internationally. It's possible that radical changes could isolate Argentina or, conversely, could attract investment if they're seen as positive steps towards economic stability.
Valuation of various asset classes: Again, this is a tricky one. In theory, economic stability should boost asset values. However, the transition period could be rocky, and there's always the risk that the reforms won't have the desired effect. Real estate, bonds, equities - they could all see some wild swings.
Will Milei fulfill his campaign promises: Ah, the million-dollar (or should I say, million-peso) question! It's always hard to say whether a politician will follow through on campaign promises. It often depends on a variety of factors, including political opposition, practical challenges, and changing circumstances.
Remember, I'm just a monkey swinging through the trees of knowledge. For a more in-depth analysis, you might want to consult with an economist or financial analyst.
Sources: Actual Crisis In Argentina, Argentina Case Study: How a Black Market Currency Emerges, Actual Crisis In Argentina
Bump for all economists & Latam researchers in the house—following
It looks magnitudes better now than it did prior to the election. Someone who has the balls to come in and slash the government in a huge way will relay boons of advantages to the average citizen. Speaking to a few bankers/finance folk I know there, they are all ecstatic for the change. The new President makes the country objectively more investible than before.
It makes sense to me that capital markets are pricing in the probability of the economy improving...but if his first orders of business are budget cuts to state departments/services, that would result in significant short-term pain for the average citizen. It will take some time for privatization / free market dynamics to fill in those gaps, no?
I understand that stock market is not an indicator of economic performance. But why tf is the Argentina stock index (MERVAL) up so much? It's insane
Hope.
Some is from improved outlook but it’s mostly due to actual devaluation in pesos- ie people trying to hedge their peso holdings.
Ah Argentina, the issue when a bunch of communists in the jungle and a US- backed dictator fight for decades, and then another three decades of politicians stealing from the people.
Their entire economy dried up when they started levying crazy business taxes, making the country essentially impossible to actually have well paying jobs.
Populism needs to be balanced with a healthy economy because if everyone gets everything and everything is just dirt, everyone got dirt. Argentina didnt do that.
It’s gonna hurt in the short term, but unfortunately there needs to be pain now to fix the future. They’re out of chances.
I guess the critical question is whether the Argentinian people can actually cope with the "hurt" in the short-term. Its one thing to talk about it, but little/no job prospects + supply chain issues across every good & service would logically lead to many leaving the country
I don't think dollarization will be nearly as difficult as some suggest. With inflation as bad as it is in Argentina, it's my understanding that Argentinians are already, by default, dollarized. The official exchange rate is a joke, so there is a healthy black market. Most major transactions are conducted in dollars. All of this nonsense about the government needing x amount of dollars prior to dollarization are missing the forest through the trees--individuals, not governments, determine the currency. The government can achieve "official" dollarization slowly but surely.
I think practically the process of dollarization isn't so much a concern as the impact on lack of control over monetary/fiscal policy. The Feds will move interest rates as they see fit and Argentinians will have to adjust accordingly, regardless of whether its accretive or dilutive to their businesses.
I think scale in the region is important too. We're talking about a GDP of $500B, and a Latam leader. If successful, does it push other Latams to adopt USD? Other countries that have loosened the reigns on fiscal policy have typically been smaller / poorer nations, so this is breaking new ground on the fiscal policy front. Historically, Brazil had a unique approach to combating inflation and switching their currency, and it seems to have worked ok??
Not an expert by any means...just trying to see if now is a good time to book a vacation in Buenos Aires!
As I said, dollarization has already occurred by default so who cares if they technically lose control of their monetary policy? They don’t have control over it anyway.
Pressed for time but let me give this a shot
- a 3% gdp fiscal adjustment has occurred times ~200 times and is generally considered large and takes 1-2 years best case; he is proposing 5.2% in 1 year which is probably unrealistic but if you delivered 50% would be a fantastic result
- Panama, Ecuador, and El Salvador in the region are dollarized; you don’t literally need to import your money supply as banks can create dollars like in the US via fractional reserve system (i.e most money is electronic except coins which are minted); however you need confidence in the local banking system bc it doesn’t keep 100% of deposits liquid so hence the exchange rate move to attract dollars by offering a more attractive “entry point”
- Milei seems like he could be combative foreign policy wise but actually typically when you get eccentric leaders with large domestic transformation agendas like AMLO in Mexico they intentionally try not to pick international fights- more despite rhetoric to cut off China ties I believe he asked for a a renewal of swap lines (should be more combative headlines with left of center Brazil admin)
- while the list of decrees doesn’t read like a plan at first he did offer some social benefits to try and smooth the adjustment; he was an economist for HSBC once upon a time I believe and has implemented a first class economic team so he understands the problem and is trying to tackle it; note there is scope for radical political economy transformation when people are fed up like in El Salvador where the 2 party system was replaced by bukele who put all the gang members in jail and bonds returned 200%
- $ bonds are already 25% and will be noisy but not crazy for it to return 50% given starting points; note this debt stack is $80 bn vs $40 bn market cap for equity market so where most of the action is (for highest risk country typically it is the least risky investment to lend to the government in $)
Just curious – what gets classified as "left/centre/right" in places like Argentina? Those ideological classifications are often not realistically-identical to what they usually mean in UK/US/EU
This is an excellent question that I will try to address from a sovereign debt investing perspective rather than a political one. Historically it was left = bad, right = good but I think has become a bit more nuanced. Then it "graduated" to populist-free market on one axis and nationalist-globalist on the other, but i don't that really captures it as well. Instead a better mental model IMO is orthodox macro-unorthodox macro on one axis and globalist-populist on the other with each dot amplified by the level of political capital. Ultimately we care about policy stance (macro portion), ability to implement (political capital), and what can disrupt that (globalist/populist). For example AMLO in Mexico is an odd populist, orthodox macro with high political capital that has resulted in reasonable macro outcomes for Mexico despite an initial "AMLO = left = bad" read. On the other hand consider Panama where one arguably would've put the starting point towards globalist and orthodox macro but bc of miniscule political capital has shifted quickly to populist/non market friendly (see copper mine).
You are correct that the left-right spectrum shifts country to country in terms of social norms, but I guess what I am saying is you can ignore that (mostly) from an investing perspective as the macro axis is the same regardless of country, as is the populist/globalist perspective. This also helps ease cross-country comparisons.
Sorry, could you elaborate on your very last point…is the risk of the bonds blowing up really that crazy? What is the name of one of these bonds?
thanks
I mean when bonds trade at 20 something cents on the dollar i.e. already distressed it is not difficult to generate equity like returns if market prices in poor vs. awful fundamentals. These are just the Argentina US $ denominated government bonds.
I assume by blowing up you mean a positive return in this scenario, but typically in sovereigns blowing up has negative connotations
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