Argentina’s “Milei-Quake”

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An old macro joke is that there are really only four types of economies: developed, developing, Japan and Argentina. And oh boy did we get another reminder of that this weekend. 

From mainFT yesterday:

Markets in Argentina reeled on Monday after the shock victory of Javier Milei, a radical libertarian economist and outsider candidate, in the country’s primary poll ahead of its presidential election later this year.

Bonds and equities both swung wildly after Milei won more than 30 per cent of the vote on pledges to dollarise the country’s economy and dramatically cut spending.

The central bank responded quickly by devaluing its official exchange rate by as much as 18 per cent to 350 pesos per dollar to stabilise markets. It also lifted interest rates by 21 percentage points to 118 per cent as it runs out of means to defend its currency.

This is an entire country trapped in an unfunny Groundhog Day. Argentina constantly swings violently from one political extreme to another, with every fleeting spasm of reform and macroeconomic improvement over the years quickly overpowered by the seemingly irresistible force of simply being Argentina.

So, will its next president be someone who has vowed to burn down the central bank, legalise organ sales and wants to dollarise the economy without any actual dollars? Maybe not. JPMorgan notes how the participation rate in the weekend’s poll came close to the post-Covid lows, which could mean that the establishment parties do better in the actual general election.

History shows that participation rate usually increases between the primaries and the general elections by about 4%-pt on average. That said, given the historically low participation rate and the strong underperformance of Massa and Larreta vis-à-vis polls (by about 4%-pt each), it seems fair to assume that participation rate could grow even higher than that observed on average. Against this backdrop, a higher turnover rate in the general elections could favor Juntos por el Cambio and Union Por la Patria, suggesting higher upside for traditional parties in the general elections as compared to Milei, which we see closer to its ceiling in terms of vote intention.

However, given that it’s Argentina, the smart money is always on the most chaotic outcome. And given the already fraught economic and financial background — plus Argentina’s permanent dance with the IMF — the “Milei-Quake” is still going to “usher in a period of intensified uncertainty”, according to JPMorgan (sellsidespeak for ‘wot a mess lol’):

The existing financial landscape is set to deteriorate further, potentially exerting an influence on the October elections. The interplay between economic dynamics and political maneuvering underscores the complexity of the situation, adding an extra layer of uncertainty to an already intricate web of challenges. As we move closer to October, the intricate dance between economic realities and political ambitions will undoubtedly shape the course ahead.

Goldman Sachs highlights that the currency devaluation and rate hike is at best a sticking plaster. The new official 350 pesos per dollar exchange rate is still wildly out of whack with the ca 630 rate the peso is actually trading at, and net international reserves are now actually negative.

Goldman also engages in a bit of frustrated hand-waving at the scale of the Argentine mess:

The macroeconomic backdrop in Argentina remains very complex. Inflation is tracking in the triple digits and is likely to accelerate in the coming months, international reserves are at critically low levels with net international reserves in negative territory, and the program with the International Monetary Fund (IMF) has suffered setbacks. Recently and after some delays, IMF and Argentine authorities reached a staff-level agreement on the combined fifth and sixth reviews of the EFF program. Given the lack of compliance with the quantitative targets of the program, however, Argentina would have to request waivers from the Fund’s Executive Board, for the approval of the review and setting of new targets. In our view, while today’s decision could be part of the discussion between the IMF and Argentina, we believe that the Fund and the next government will need to holistically review the program as part of a more comprehensive macroeconomic program that puts the economy on a structurally more sustainable trajectory.

The problem for the IMF is that Argentina is comfortably its biggest debtor, after a stupendously big programme signed in 2018 that almost immediately veered off course. And as the cliché goes, if you owe the bank a million dollars you have a problem; if you owe it $44bn then the bank has a problem.

Yesterday evening the IMF released the following terse statement:

On July 28, the Argentine authorities and IMF staff reached staff-level agreement on the combined fifth and sixth reviews under Argentina’s 30-month Extended Fund Facility (EFF) arrangement. This agreement is subject to the approval by the IMF Executive Board, which is expected to meet on August 23 to unlock the agreed disbursements.

We welcome the authorities’ recent policy actions and commitment going forward to safeguard stability, rebuild reserves and enhance fiscal order.

Ok then!