Markets have responded with mixed emotions to the election of "anarcho-capitalist" Javier Milei as Argentina's next president. While the country's benchmark bonds have experienced a slight increase from 26.5 cents on the dollar to 28 cents, the peso has once again taken a plunge, dropping from 850 to the dollar to as low as 1,100.
This ambivalence reflects the uphill battle that Milei faces in his mission to "end decadence in Argentina," a promise he made to his supporters during his victory speech. Ilke Pienaar, head of emerging markets sovereign research at PineBridge Investments, cautiously endorses his aspirations, but highlights the challenges he will encounter. Pienaar believes that if Milei can navigate through the midterm elections in 2025 without facing impeachment or serious social unrest, he could potentially usher in a new era for Argentina.
The fact that 46 million Argentines chose a political outsider—a person who campaigned with a chainsaw and compared Pope Francis to the devil—speaks volumes about the desperate state of the country. With inflation levels hovering around 150% annually and almost half of the population living in poverty, it is clear that drastic change is sought after. Milei's opponent in the election was Sergio Massa, the current economy minister, and Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management, remarks that the previous administration had set the bar incredibly low.
However, it is unfortunate that Milei's proposed solutions will most likely contribute to further inflation in the short term. His plan to drastically reduce state spending by cutting generous subsidies for fuel, electricity, and transportation will undoubtedly burden consumers even more. Argentina also suffers from destructive currency controls, with Massa's government enforcing an excessive number of official exchange rates. If Milei were to eliminate this system, Larose estimates that the so-called offshore rate for favored importers would plummet by 40%, resulting in further price increases. It seems that, paradoxically, a temporary increase in inflation is necessary to combat hyperinflation.
Ryan Berg, director of the Americas Program at the Center for Strategic and International Studies, explains that Argentine unions and other "social organizations" have a long history of impeding necessary reforms through strikes or demonstrations. The proposed cuts to energy and transport subsidies are particularly sensitive issues that have the potential to mobilize large numbers of people to take to the streets.
In conclusion, Milei's election as Argentina's next president has garnered mixed reactions from the market. While it presents an opportunity for significant change and reforms, the path ahead is fraught with challenges that need to be navigated carefully. Only time will tell if Milei's vision for Argentina can be achieved without causing further turmoil in an already struggling nation.
Milei prepares to tackle formidable opponent in upcoming election
Milei, a rising political figure in Argentina, is gearing up to face off against Axel Kicillof, a well-known member of the outgoing Peronist bloc’s left wing. Kicillof recently secured his re-election as the governor of Buenos Aires Province, which is home to over one-third of Argentina's population. The upcoming president will have to navigate carefully and find common ground in order to pass any legislation through Congress. Milei's party, Freedom Advances, currently only controls 15% of the lower house and even less in the Senate.
Milei has gained significant traction and leverage with his recent victory, boasting a 56% to 44% win. This victory marks the largest in Argentina's democratic history and is largely attributed to the dissatisfaction of younger voters. According to Berg, a political analyst, "This was truly a resounding result."
What's more, Milei has garnered the support of Mauricio Macri, Argentina's most recent right-leaning president who served from 2015 to 2019. The backing of Macri's Together for Change party could potentially bring about parliamentary majorities. It is worth noting that despite Milei's previous criticism of Macri, he appears to be reaching out to his circle for guidance as he lacks an economic brain trust of his own. Federico Sturzenegger, a former central bank head during Macri's tenure, is currently the favorite candidate for the position of economy minister. Additionally, Domingo Cavallo, an individual who successfully tackled hyperinflation in the 1990s, has shown support for Milei.
In hindsight, it seems that one of Macri's key mistakes was implementing reforms too cautiously. Milei, on the other hand, appears well-suited to address this flaw head-on. According to Berg, "The lesson Milei's team learned from Macri is to take decisive action instead of incremental changes."
One of Milei's central campaign promises is to stabilize Argentina's economy by adopting the dollar as the national currency. This idea, although initially met with skepticism, may not be as far-fetched as it seems. Many ordinary Argentines already save and invest in dollars, making a formal transition away from the peso a possibility if the next 18 to 24 months prove successful.
While the election results have pleased investors, it is essential for tangible outcomes to materialize in order to sustain a positive market response. As Larose asserts, "We need to see real progress in order for assets to experience a lasting rally."
