The government is approaching critical times as Congress is starting to debate the “Ley de Bases”. The bill includes a fiscal package as well as some structural reforms that should help to improve productivity and increase investment and growth. This is a tone down version from the law that was sent to Congress in February and then withdrawn because the government considered that Congress was softening it too much.

1) How would the economy look at the end of 2024 to be considered a success? A successful adjustment would mean most of the following features. Firstly, the inflation rate has to be comfortably in one digit. We think that unless there is a conventional stabilization plan (i.e. a regime change) inflation will hover around 6-7%. That fits the criteria of one digit, but it is probably higher than what the government is hoping for.

Javier Milei has had a good beginning on the economic front. Investors like what they see, the IMF supports his policies, and the US has been sending top government officials to visit Buenos Aires, a gesture that is welcome by the government. Despite the tough policy measures that have been implemented Milei´s popular support remains high with a positive image of around 50%.

The Milei administration has generated high hopes in the market, mainly because of its decision to eliminate the fiscal deficit and undertake structural reforms. In addition to those objectives, it stated clearly that he wants to unify the foreign exchange market this year, eliminate the FX spread, and replenish international reserves.

The Milei administration has generated high hopes in the market, mainly because of its decision to eliminate the fiscal deficit and undertake structural reforms. In addition to those objectives, it stated clearly that he wants to unify the foreign exchange market this year, eliminate the FX spread, and replenish international reserves.

Milei has started his presidential mandate with policy measures that generate some hope. True, he confronts huge challenges, as he received an economy in intensive care with negative international reserves, a grossly overvalued currency, rampant inflation, a large fiscal deficit, and no access to international credit. He is taking steps to correct it.

Milei has been elected with roughly 56% of the popular vote, which means that he has a strong mandate to go ahead with his plan for stabilization and structural reforms.  On the other hand, he has a small representation in Congress, including only seven senators out of a total of 72, and hence he will have to work with the opposition to get the approval of most laws. None of the 24 governors belong to his party and is thin on the ground in terms of union support and more importantly an army of public managers to implement the reforms.

Massa was the big winner in the general election and appears to be the front runner in a runoff that is likely to be very tight. The fact that he came in the first position with 37% of the votes was a surprise, as most pollsters were expecting Milei to lead, but he ended in the second place and only managed to maintain 30% of the votes. Patricia Bullrich came in third, well behind gathering only 24% of the votes, a big loss for Juntos por el Cambio, whose future is uncertain.

The economic situation continues to deteriorate, and it is now clear that whoever wins the general elections will have a colossal challenge in December. He or she will have to deal with an extremely fragile situation including a high and probably rising rate of inflation, the need to devalue to reduce the FX spread, reduce the fiscal deficit, increase utility rates, remove the FX controls, and design a strategy to quickly increase reserves to avoid a new default on external debt.

The primary elections came with many surprises. The big winner was Javier Milei, who was in the radar and was thought to be competitive, though nobody expected that he would end in first place and obtain 30% of the votes. Rodriguez Larreta was the big loser, as he lost badly the primary to Patricia Bullrich, who is now the candidate of Juntos por el Cambio (JxC). The Peronists had a poor election and finished in third place, but they still have a good chance of winning the province of Buenos Aires, where Axel Kicillof won, and they are likely to have a close race with JxC for the governorship. In Buenos Aires there is no second round.

The economic discussions have been dominated by the day-to-day developments in the negotiations between Argentina and the IMF. The other key piece of analysis is on the impact that the primaries (the PASO) might have on key variables such as the parallel exchange rate, inflation, the country risk and on overall financial stability. The latest news is that there is a technical agreement between the IMF staff and the government and is almost a certainty that the IMF Board will approve it sometime in the second half of August. This will be the last review until November.

The macroeconomic problems remain the same. Policy dilemmas have not changed, but the situation is rapidly deteriorating, and the outcomes remain uncertain. The government’s unwillingness to tackle the critical policy problems, perhaps hoping that the bleeding of reserves would miraculously come to an end or that inflation would somehow fall into place have put the economy in an extremely fragile situation. And there are no expectations that things are going to improve.

The macroeconomic situation is deteriorating rapidly in Argentina. There is little chance to imagine that it can improve on the way to the elections.  The pressing problem is the lack of reserves, which is a direct consequence of a grossly overvalued currency and the inability to control the spread between the official and the parallel exchange rates.  The drought made things worse, although the Central Bank was already playing at the limit by sustaining a fragile situation mainly by imposing FX restrictions rather than depreciating the currency.  Reserves are now so low that the Central Bank has no margin whatsoever to absorb any type of negative shock.

Events are taking place at high speed. The severe drought, probably the worst in six decades, is creating new challenges for economic policies.  Exports are likely to drop by over USD 20 billion and it remains unclear how the Central Bank will manage a drastic shortage of dollars.  But the story does not end there. The Treasury is losing much needed tax revenues and the primary deficit is now likely to widen to 3.6% of GDP, well above the 1.9% of GDP target that is in the IMF program.  In addition, the drought is making the recession worse, and now we estimate that the economy will contract around 4.5% this year after growing 5.2% in 2022.

Is it the economy? Is it politics? The chicken or the egg? This is the question today in Argentina, where there is a debate regarding which is the biggest obstacle to turn around an economy that has been stagnating for more than a decade.  Obviously, a switch towards better economic policies is necessary, but the key question is whether the main obstacle is reaching a good diagnosis of the situation, designing a comprehensive program or if the issue is that implementation requires a political leadership and vision until now elusive.

If we could go back in time and try to find a year that looks like 2023 the answer is pretty obvious: 2015.  It was the last year of the Kirchner administration, which was struggling to get to the presidential elections in one piece.  It was fighting a man-to-man battle to defend reserves and avoid devaluation. The instruments relied on maintaining very tight foreign exchange and capital controls, combating inflation through intervention, and having utility rates and controlled prices that did not cover costs. The consequence was suffering a large spread between the official and the parallel exchange rates, relying on the Central Bank to finance a large fiscal deficit, and failing to have access to the financial markets. Essentially, a picture of the current situation.

A year full of volatility and uncertainty is coming to an end, and everything suggests that next year will not be very different. But many things happened throughout the year, some better than expected and others worse.  There were some worrisome months, but the worst-case scenarios that some analysts predicted (such as hyperinflation or a default with the IMF) did not materialize.

The economy continues to be in slow motion mode, as there is a gradual deterioration in economic activity, inflation remains relatively stable in the 6.3% range, international reserves dropped but have not collapsed while the parallel exchange rates remain relatively stable. While there are still concerns about one of the typical Argentine crises that leads to an explosion of the exchange rate, inflation, and domestic interest rates, and which is some cases includes a restructuring of the domestic or foreign debt, the explosion has not happened yet. The government has been able to maintain what at first sight are unsustainable policies through intervention and creative unorthodox policies. In this way, it has been managing to postpone the “inevitable” and its bet is that is it will be able to muddle through throughout the election year.

We attended the IMF meetings that took place in Washington in mid-October.  The main theme was world inflation, where the discussions centered on whether the burst of world inflation was just caused by temporary supply shocks due to the pandemic and the war in Ukraine, or in if instead it was mainly driven by the very expansionary monetary and fiscal policies that governments implemented during the initial periods of the pandemic and did not reverse in time to avoid the rise in inflation. 

Massa has been almost two months commanding the economy, and the results so far have been mixed, though probably better in some important respects that one could have expected.  The challenges remain large, because they were significant in the first place, especially on the external front (including the exchange rate and reserves) and on inflation, where the outlook remains rainy.

This has been a hectic period in Argentina. Minister Batakis had a short interregnum in which she made the right announcements, but markets did not believe she could deliver. The currency depreciated sharply in the free markets, Argentina’s country risk increased, and the government became nervous.  After just three weeks in her position and a trip to Washington to introduce herself to the IMF and the US Treasury, she was replaced by Sergio Massa, a lawyer with good connections within the government coalition, including with Cristina and Máximo Kirchner, and with the business community.

Batakis takes over the Ministry of the Economy at an extremely difficult time. Reserves are at a critical level, as they just cover less than two weeks of imports, inflation is accelerating, and the parallel exchange rates seem to be out of control.  If we add to these problems a fiscal deficit that far exceeds the targets set with the IMF and severe problems to roll-over the domestic debt, everything points to a perfect storm that can take place at any time.

The economic and political situation continued to deteriorate in recent weeks.  Cristina Kirchner escalated the confrontation with Alberto Fernandez in two speeches in which she criticized once again the agreement with the IMF, and especially the effectiveness of the policies to preserve international reserves and to deal with inflation.  Cristina believes in controls, and her main criticism was to the Central Bank and to the Trade Secretariat which, in her opinion, were not tough enough controlling imports and price increases.

The IMF program triggered a conflict within the government coalition between the populist and more “orthodox” sectors. The key differences are the importance that each of then attach to the targets set in the IMF program. Targets require tighter monetary and fiscal policy, and the difference in the approach to deal with inflation, where the most radicalized sectors put the priority on price controls and on limiting the increases in utility rates while others put more emphasis on the fiscal imbalance, on reducing energy subsidies and on a more prudent monetary policy. 

The IMF agreed to a light program with Argentina that could easily be criticized for its lack of scope and depth. It seems that it was a set of policies that represented the minimum common denominator between the demands of the IMF and what the Government offered. Fortunately, it was not an empty set, though not far from it. One could defend the program because, while it required few policy measures, at least it aimed to transit the next year and half without suffering a major deterioration in macro-performance waiting until the next administration takes over. And perhaps then, and only then, a real program might be put together.

The IMF program was finally approved by Congress, though at a heavy cost for the government because Cristina and the Campora opposed it.  Fernández had to rely on the opposition for the approval in Congress and had a setback regarding the law because the opposition was only willing to vote for the new IMF financing without any mention to the content of the program.  This was seen as a defeat for Minister Guzman who was seeking broad support for the program, which he did not get from the opposition, nor from Cristina.

There will not be a default with the IMF and the agreement seems to be around the corner.  Despite some political noise from the “Campora” and other radicalized sectors of the government coalition, it seems that there will be a program and that the worst possible scenarios will be avoided. However, this will be a sui generis program that will stop short of what Argentina needs to turnaround the large economic imbalances that the country faces. The program is unlikely to make a dent on inflation, on the FX spread, on the country risk nor is likely to significantly increase international reserves or restore investment and growth to desired levels. 

All eyes are now focused on the IMF program.  The clock is ticking, and the bets are on whether Argentina and the Fund can reach an agreement by March 22nd.  The government has been sending clear signals that it wants to avoid a default with the Fund. Foreign Minister, Santiago Cafiero, traveled to Washington to appease the US government, in line with what Manzur, the Chief of Cabinet, has been saying. President Fernandez has repeatedly stated that Argentina will not enter in arrears with the Fund. 

There were few achievements last year, but many of the problems that troubled the economy at the beginning of 2021 are still alive and kicking.  The exchange rate, and the risk of a steep devaluation, was one of the main concerns since the beginning and has remained a main issue throughout the year.  The government has been able to sidestep the problem thanks to a large increase in agricultural prices that generated a windfall of almost 16 billion dollars.  But the issue has not disappeared as the additional dollars have vanished and international reserves dropped to worrisome levels.