Argentina’s new president, Javier Milei, has swiftly taken the reins of power, triggering a cautious response from financial markets. Known for his Trump-esque populism rhetoric, Milei’s inauguration has set the stage for a significant economic shift, leaving investors on edge, especially in light of the country’s substantial lithium reserves.
Less than 24 hours into his presidency, Milei has made a bold move by reducing the size of Argentina’s government by more than half. This decisive action has prompted a mixed reaction in the financial markets, with local stocks rising at the beginning of the “Milei era” on Monday. Investors, however, remain on standby, anticipating the promised economic shock therapy.
The official peso, under scrutiny amid calls for a reset, experienced a dip consistent with a controlled devaluation initiated months ago. Meanwhile, dollar bond prices saw a marginal decrease, accompanied by tightened spreads. Offshore trading of stocks increased by 0.2%, and the local market surged nearly 4%, reaching a record high.
Milei, 53, delivered an inaugural speech heavy on rhetoric but light on specific economic plans. He emphasized the inevitability of a sharp, painful fiscal shock to address the country’s monumental challenges, pledging a fiscal adjustment equivalent to 5% of GDP, primarily through cuts to the state rather than the private sector.
Details of the economic plans are expected to be unveiled by the new economy minister, Luis Caputo, on Tuesday, according to a government spokesperson. The first cabinet meeting minutes revealed a focus on scrutinizing the government payroll, revising contracts from various ministries, and examining direct contracts with universities.
However, skepticism looms as Viktor Szabo, an emerging markets portfolio manager at abrdn, noted, “You can gain time from the market if you make the right noises, but you have a population that over the last 50 years has gotten used to Peronism, so it will be hard to explain to them that there is hardship to come.”
The challenge ahead for Milei is formidable, with hyperinflation and recession casting a shadow over the need for deep cuts to public spending. Complicating matters further are looming debt obligations, with Argentina set to pay over $4 billion to the International Monetary Fund and private sector creditors by the end of January.
Despite the uncertainties, some market observers suggest that the possibility of restructuring or default is already factored into dollar bond prices, currently trading below 40 cents. Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management, commented, “It trades at half the price of countries that are in default, so if there’s another restructuring, the market is not going to get shaken up by that.”
While offshore stocks showed a modest increase, the central bank, still under outgoing leadership, announced restrictions on currency market transactions during the “transition” period. The market awaits Santiago Bausili’s formal takeover as the new central bank head, pending a presidential decree expected to be signed and published on Tuesday.
In his unconventional inaugural speech, Milei doubled down on his radical proposals, including dollarizing the economy, closing the central bank, and reducing government spending. His economic experiment has garnered mixed reactions, with concerns raised about its potential impact on vulnerable populations.
As Graham Stock of BlueBay Asset Management remarked, “The inaugural speech was for show, but now he (Milei) needs to get down to the hard graft of governing.” The government’s measures, involving major fiscal cuts and increased social spending, reflect the delicate balance Milei must strike to avoid social unrest.
Argentina has decided not to join the BRICS bloc of developing economies, a decision confirmed by Diana Mondino, the incoming Foreign Minister chosen by Milei. Mondino made the announcement on social media platform X, stating, “We will not join the BRICS.” This decision aligns with Milei’s right-wing populist stance, and it signifies a departure from the earlier plan for Argentina to become a member of the bloc on January 1, 2024.
Milei’s rise from a fringe television pundit to Argentina’s president marks a pivotal moment in the country’s history. As he navigates uncharted waters, the world watches with keen interest to see if his unconventional approach can lead Argentina out of its economic turmoil.
Information for this briefing was found via Reuters, Courthouse News, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
