A store displays its exchange rates in Buenos Aires, Argentina, Wednesday, Dec. 13.Natacha Pisarenko/The Associated Press
Getting Argentina’s economy firing again might look like mission impossible, yet some long-suffering investors are daring to dream its new president can deliver where others have failed.
Javier Milei is putting South America’s second biggest economy and serial debt defaulter into shock therapy, kicking off by halving the value of the peso and slashing its spending.
And in an indication of how investor sentiment has turned since Milei burst on the scene, Argentina’s bonds have surged by around 25% in the last week and 40% since he won the presidency.
Milei’s plans were cheered too by the International Monetary Fund, whose $44 billion loan programme has kept Argentina from implosion, as “bold initial actions” after recent “setbacks”.
The IMF has pledged to work “expeditiously” to get Argentina back on track, which will be music to the ears of Milei, with the country due to pay the fund nearly $2 billion in January.
Jeff Grills, head of emerging markets debt at Aegon Asset Management said the new government has taken “all the right steps” so far and was making all the necessary noises.
Combined with tax changes, export measures and capital controls, Milei’s aim is to begin rebuilding Argentina’s depleted foreign exchange reserves so it can pay its bills.
These include the $13.7 billion it owes on international bonds between now and mid-2025, the first $1.54 billion of which falls due next month.
“This is not a political choice, this is a necessary choice,” said Riccardo Grassi, Head of Risk Management at hedge fund Mangart Advisors, which was involved in Argentina’s last restructuring in 2020 and holds its bonds.
If everything went perfectly for Milei, a healthier-looking Argentina could potentially regain “moderate” access to global borrowing markets in 2025, Grassi said.
If not, bondholders would be asked to give it additional debt relief, although they would need to be kept onside.
“The more relief you ask for, the longer the country will be unable to access the markets,” Grassi said, adding that such access was crucial for any big country to function normally.
DEEP PROBLEM
Weary investors have had their hopes lifted before, most recently under the government of Mauricio Macri, which ended in despair when Argentine voters lost faith in his approach.
This time the task seems larger and money more scarce, said Paul McNamara, a veteran investment manager at fund firm GAM.
“There is no way to stability that is feasible right now,” he said, adding that Argentina was in no better position than when it last defaulted. That was its ninth default and McNamara said he expects a tenth “sooner rather than later”.
“It is a very, very deep problem,” he said, describing the task of cutting spending without triggering public unrest. “So I’m really struggling to see how this ends well”.
But others say that Milei and new Economy Minister Luis Caputo are trying to solve the crux of Argentina’s dysfunction.
Caputo described the fact that it had only managed to balance the books in 10 of the last 123 years as an “addiction”, adding there would be long-term gains after short-term pain.
The rapid devaluation of the peso, which will continue at a rate of 2% a month, is among measures which include slashing energy subsidies, cutting the size of government and halting public works tenders in an attempt to cut the deficit to zero.
DARING TO DREAM
The dream scenario for Morgan Stanley is that Argentina’s bonds double in value next year. They have already surged more than 40% since Milei won the presidency in November but are still trading at a 60% discount to face value.
For such returns to materialise, bond yields - which reflect borrowing costs and move inverse to price - would have to fall to around 11%.
The question for investors if whether Argentina can trade at yields of 11% by end-2024 when they are as high as 40% now.
“It would require both an extraordinarily supportive external environment and then also for the domestic adjustment to proceed perfectly,” the U.S. bank’s analysts said.
Capital Economics’ analysts highlight there is still no clarity on how Milei plans to defuse the “Leliq bomb”, the central bank’s huge stock of short-term, peso-denominated debt.
The supersized devaluation will not necessarily draw a line under the peso’s problems either.
Maintaining a “crawling peg” against the backdrop of surging inflation will leave it overvalued and “set Argentina up for another large – and potentially disorderly – devaluation further down the line,” Capital Economics also warned.
While GAM’s McNamara highlighted the problem the IMF faces because of how much it has lent Argentina, Mangart’s Grassi said the aims of the two parties are, for once, perfectly aligned.
“For the first time in a long time we might see a situation where the IMF does the job it is supposed to do and helps fix the country,” Grassi added.
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