Markets have responded with a mix of optimism and uncertainty to the election of “anarcho-capitalist” Javier Milei as Argentina’s next president. While the country’s benchmark bonds have seen a slight increase from 26.5 cents on the dollar to 28 cents, the peso has experienced a sharp decline from 850 to the dollar to as low as 1,100.
Milei has vowed to “end decadence in Argentina,” as he assured his supporters in his victory speech. However, the challenges he faces are evident, and it remains to be seen if he can navigate through potential impeachment threats or street chaos until the midterm elections in 2025. Ilke Pienaar, head of emerging markets sovereign research at PineBridge Investments, cautiously acknowledges the potential for a new era but remains guarded in their endorsement.
The fact that 46 million Argentines chose a political newcomer who campaigned with a chainsaw and drew comparisons between Pope Francis and the devil speaks volumes about the country’s desperate state. With inflation reaching nearly 150% annually and almost half the population living in poverty, Sergio Massa, the current economy minister, stood against Milei as his opponent. Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management, points out that the bar was set incredibly low by the previous administration.
Unfortunately, Milei’s proposed solutions are likely to accelerate inflation in the short term. By implementing his promised budget cuts, which have been compared to using a chainsaw, he aims to remove generous subsidies for fuel, electricity, and transportation. Unfortunately, this will further burden consumers financially.
Argentina’s currency controls present another significant problem. Massa’s government currently maintains eight official exchange rates, which has caused considerable distortions. The “offshore rate,” reserved for select importers, stands at 350 to the dollar. If Milei were to abandon this system, Larose estimates that it could lead to a 40% drop in the exchange rate, resulting in higher prices. Larose adds, “To cure hyperinflation, you need to have even more inflation temporarily.”
Ryan Berg, director of the Americas Program at the Center for Strategic and International Studies, explains that Argentine unions and “social organizations” have a history of halting painful reforms through strikes and demonstrations. He specifically mentions that reducing energy and transport subsidies is a sensitive issue that can mobilize people to take to the streets.