The Experiment in Argentina - Javier Milei Wins and Work to Do

By: Peter Frerichs

November 8, 2024

Originally published here

Insight Highlights

• A potential lending uptick and favorable credit ratings
• Milei’s signature achievement - scrapping rent control
• Keeping China close
• Congressional challenges and the path forward

Source: Politi, Daniel, and Biller, David. October 21, 2023. “A man, a plan, a chainsaw: How a power tool took center stage in Argentina’s presidential race.” Associated Press.

Argentina’s Javier Milei might be the most colorful political figure next to Donald Trump. Few have the nerve to don a chainsaw at a rally, albeit one with their name on it. The Argentinian president has four dogs who all bear the names of Milei’s economist heroes: Milton (Milton Friedman), Robert and Lucas (Robert Lucas), and Murray (Murray Rothbard).

The pooches’ names alone suggest that, for Argentina, Javier Milei is a drastic departure from the statist politicians that have ruled this once influential South American powerhouse since 1946. We initially wrote about Milei's rise back in January of this year. The piece concluded by positing, “Can Milei solve Argentina’s economic crisis?”

Just over ten months in, let’s take the temperature.

Signs of Credit Daylight

For the first time in a long time, Argentinian banks are reporting a resurgence of credit demand.1 The spigot has been painstakingly dry, but the corporate sector in particular is pepping up and major banks, such as Galicia and BBVA Argentina, are expecting real loan growth of roughly 30% for the year.2

In March, S&P Global raised the country’s local currency sovereign credit ratings to ‘CCC/C’ from ‘SD/SD,’ and the long-term foreign currency rating to ‘CCC’ from ‘CCC-.’3 But perhaps the biggest news was MSCI’s potential upgrade for Argentina to emerging market status.4 Should Argentina rejoin the MSCI EM indexes, JP Morgan estimates potential inflows in the $1 billion range.5

Stubborn Poverty

While the capital markets news is welcome, Javier Milei and his administration continue to struggle with stubbornly elevated poverty rates.

Source: Reuters. September 26, 2024. “Argentina poverty rate soars over 50% as Milei austerity bites.”

Coming into office Milei promised three things:

1. Slash government spending
2. Cut bureaucracy
3. Devalue the peso

Also known as “shock therapy,” outside observers predicted this campaign fulfillment would result in a rise in poverty. No surprises here but rates this high do risk derailing what could be the region’s biggest turnaround story in decades.

Milei and his supporters rightly point out that since Q3, there has been an emerging rise in real wages.6 This has contributed to greater economic activity and some analysts believe the recession likely ended in Q2 2024.7

The President was fully transparent with the electorate during his campaign, communicating frequently that there would be short-term pain and a recession. While some critical welfare programs have been cut, Milei has in parallel expanded the Universal Child Allowance and a popular Food Card program providing support to families in need.

Scrapping Rent Controls in Argentina - Javier Milei’s Signature Achievement

For decades, Argentina was home to some of the world’s most illiberal rent-control laws. Previous Peronist governments argued it was the only way to keep homes affordable, but like most rent-control experiments, the results typically:

• Limit the overall housing supply
• Reduce housing quality and maintenance
• Constrain residential mobility

Perhaps Milei’s most celebrated move to date has been a complete dismantling of the rental law, thus fueling Buenos Aires rental unit supply by a whopping 170%.8 While rent controls are wonderful for those with a locked-in rate, the reduction in supply makes it impossible for others gain access. Over the short term, those who enjoyed rental controls are now paying more than they previously did. However, rental prices are stabilizing with monthly price increases registering their lowest rates since 2021.9

Keeping China Close

Maintaining healthy relationships with trading partners like China is critical amidst slashed government spending and a currency devaluation to keep the economy advancing. While on his campaign trail for Argentina, Javier Milei was an attack dog on communism and even referred to Chinese politicians as assassins.10 Like former President Donald Trump, Milei has a loose tongue, which rightly prompted many to wonder how he would eventually treat the country’s second biggest trade partner.

To his credit, Milei has moderated on China, which is critical to Argentina’s recovery path. China invests heavily in Argentina, and the country’s exports to China have ballooned eightfold over the past two decades.11 Yet, for Argentina, Javier Milei is treading a fine line as he frequently criticizes the growing risk of communism and is by far the most pro-US president in South America.12

China’s growing interests in Argentina and the continent are heavily linked to lithium deposits.

Source: Attwood, James, and Gilbert, Jonathan. May 19, 2022. “Lithium Triangle Unites for Push Toward Battery Making.” Bloomberg.

The Chinese company, Tsingshan, is part owner of a mammoth $800 million lithium project, joining peer firms such as Ganfeng Lithium and Zijin Mining. These are strategic investments for both countries that, for now, at least, appear safe and stable.

Congressional Challenges

It took some time, but Milei was finally able to push through two reform bills in June. The first delegates emergency powers to the president, creates foreign-investment incentives, and privatizes select state-owned firms. The second is centered on tax collection.13

For Argentina, Javier Milei notched a win with investors and the International Monetary Fund (IMF), which has loaned the country absurd sums of money over the years. With sweeping emergency powers for one year, Milei has already signaled a slew of tax benefits to investors of $200 million plus, as well as permission to purchase equity in some state-owned enterprises.14

Milei’s challenge from the very beginning was going to be Congress. The Argentinian president began his tenure with support from just 78 out of 257 congressional seats and 13 senators out of 72.15 Moreover, the country’s regional governors are unusually powerful and greatly influence how congressional representatives vote. Milei’s La Libertad Avanza (LLA) party is currently not represented.

Keep an Eye on Two Things Moving Forward

Argentinians tend to sour on their elected leaders once they spend some time in office. Unsurprisingly, Milei’s popularity has turned south in recent months.

Source: Jourdan, Adam. September 24, 2024. “Argentina’s Milei sees gravity-defying poll numbers start to fall.” Reuters.

The President has avoided a precipitous drop in popularity by keeping monthly inflation relatively steady, yet the austerity measures have certainly muddied Milei’s numbers in his first year.

The Finance Ministry recently indicated that Milei’s 2025 budget will likely result in a 5% economic growth rate.16 His long-awaited presidential speech to Congress was delivered to a half-empty chamber, suggesting work remains in solidifying the support he will need. To advance Argentina in 2025, Milei needs to do two things:

1. Achieve a level of consensus with provincial governors.
2. Grow his legislative coalition to put in place his policy plans.

Investors are looking favorably on Milei’s moves.17 He has surprised onlookers in his first 10 months, despite the unfavorable odds that awaited him in January. Brazil might finally have an economic neighbor to contend with sooner than later.


Sources:

1. Dwyer, Rob. August 22, 2024. “Argentina banks hopeful of a return to normal.” Euromoney.
2. Ibid.
3. S&P Global. March 15, 2024. “Argentina Long-Term Ratings Raised To ‘CCC’ As Debt Exchange Is Finalized; Outlook Stable.”
4. Reuters. August 20, 2024. “MSCI reclassifying Argentina could trigger $1 bln of inflows, JPMorgan says.”
5. Ibid.
6. BBVA. October 1, 2024. “Argentina Economic Outlook. October 2024.”
7. Ibid.
8. Dubé, Ryan. September 24, 2024. “Argentina Scrapped Its Rent Controls. Now the Market Is Thriving.” The Wall Street Journal.
9. Ibid.
10. Dubé, Ryan. August 18, 2024. “Argentina’s Milei Finds It Hard to Decouple From China.” The Wall Street Journal.
11. Ibid.
12. Dubé, Ryan. May 29, 2024. “Argentina’s President Tours World to Meet Supporters, Leaving Setbacks at Home.” The Wall Street Journal.
13. The Economist. June 13, 2024. “Javier Milei finally lugs key reforms through Argentina’s Senate.”
14. Ibid.
15. Olivero, Francisco, and Lescano, Salvador. March 8, 2024. “Milei Tests the Power of Argentina’s Political System.” Nacla.
16. Debre, Isabel. September 16, 2024. “Argentina’s President Milei presents 2025 budget, vowing austerity and setting up a showdown.” Associated Press.
17. Reuters. September 26, 2024. “Argentina poverty rate soars over 50% as Milei austerity bites.”