Anti-establishment, economic libertarian, Javier Milei, was the surprise winner of the primaries. Yet whoever comes to power will be forced to make radical decisions…
Argentina is being stalked by the four horsemen of the economic apocalypse: inflation, drought, war and political uncertainty. The result is economic chaos. As the incumbent, lame duck government, limps towards elections it is implementing increasingly desperate measures to keep the economy afloat. There are more than ten different exchange rates for different sectors, though none of them match the free market peso-dollar rate, which is in freefall.
The main problem is fiscal, says Ramiro Blazquez, Head of Research and Strategy at BancTrust, a London-based investment bank with a strong focus on Latin American debt. “Argentina’s fiscal deficit, if you combine the accounts of the central bank and the treasury, come to 9% of GDP. For a country with a history of default – and therefore a low tolerance for debt – it is a huge deficit that nobody is willing to finance. So, the only way the government can fund the deficit is by capital controls that trap liquidity in Argentina. That is why you have an unrealistic official exchange rate that overvalues the peso. Companies that want dollars to import goods have to use the official exchange rate. What’s more the central bank, which has a shortage of dollars, will often delay giving the dollars to the companies.
“The problem in Argentina isn’t the overall level of debt, indeed public sector indebtedness after excluding intra-public sector debt is just 50% of GDP, but the fiscal deficit. The central bank also prints money to fund the deficit which feeds inflation. Exporters complain about the overvalued official exchange rate – and I’d say that it is 20% to 30% overvalued – but that isn’t the main problem. The large fiscal slippage manifests itself through inflation and the depreciation of the exchange rate. The underlying cause is the fiscal deficit. You could have a much stronger real exchange rate if you had sound fiscal accounts.”
Not everyone agrees. Daniel Marx, an economist who has held government positions in the past and now heads up his own boutique investment bank, Quantum Finanzas, feels that too much emphasis is put on state spending. “If Argentina had grown at the world average over the last ten years, then tax could be lower than it is today and Argentina would still have a surplus, even with current levels of expenditures. When people talk about the fiscal deficit they focus on tax and expenditure but growth is also a massive component.
“Really to fix the problem we can’t just look to short-term solutions – for example next year we won’t have a drought and agricultural exports will be higher. Instead, we need to make structural reforms to the economy. I think in order to stabilise the economy you need to look at the fiscal balance but you also have to create a positive growth outlook.”
Another prominent voice in the debate is Guillermo Pérez, CEO of Grupo GNP, a well-known local tax and business consultancy. “The solution is quite simple – we need to reduce evasion, which is currently at 40%, down to European levels of around 20%. Then we need to make state spending more focused and effective. Those two measures would eliminate the problem with the fiscal deficit.”
The experts might debate about the exact remedy but they all agree that deep change is needed. The coming elections in October create political uncertainty but they are also a great way for Argentina to find a president that can reform the economy.
Investors never like betting on the outcome of political polls. That’s especially true this time, with three political forces roughly neck and neck. The ruling party Frente por Todos is in disarray with both its controversial but iconic leader, Cristina Fernández de Kirchner and its sitting president, Alberto Fernández, already ruled out from standing. However, the left-wing populist movement can count on around 30% of the population that will support it regardless. The Juntos por el Cambio coalition, that brought Mauricio Macri to power from 2015-2019, has two standout potential candidates: Patricia Bullrich and Horacio Rodrigo de Laretta. It would implement the conventional economic orthodoxy that many analysts feel Argentina needs, but some Argentines rightly question why it didn’t do a better job when it was last in power. Finally, you have the surprise candidate - libertarian upstart Rodrigo Milei, who has come from nowhere to become a serious contender. His radical proposals, such as abolishing the central bank, worry the establishment yet his unorthodox approach strikes a chord in a country that appears to have tried every economic solution without success.
At LatAm INVESTOR we don’t want to try and pick a winner, instead we look for scenarios that will happen irrespective of who wins. “In the last few months, we have seen local investors ask about investment opportunities”, says Marx. “This isn’t just an electoral trade - Argentina is on the verge of running out of money and that will force change regardless of who comes to power. The elections will improve economic management. I don’t say this because I am favouring one team over another, but the new government will have more time and a voter mandate, which will allow them to improve things.”
A typical error that many international investors make when looking at Latin America, is assuming that centre-right governments are automatically good for the economy. The current left-wing government has made many economic mistakes – and its unpopular with most of the leading business figures that we interviewed – yet it would be unfair to blame it for all of Argentina’s economic travails.
Economic chaos clearly predates this government, explains Perez. “Over the last 120 years in Argentina, we have had 27 economic crises – roughly one every four years. Of the last 40 years, 18 of them have been recessionary in Argentina. That is one of the worst records in the world, with only Libya faring more badly. Since 2011 we have not grown our GDP per capita, so we have been stagnating.” The problem is not a particular government but the economic model, continues Pérez.
The first 100 days
Whoever comes to power won’t be celebrating for long. They will have just taken on the most difficult job in world politics: How to reform Argentina’s economy while building consensus in its notoriously fractious society.
“Since 1950 the economic model has focused more on distribution than production and that has led to poverty”, says Pérez. “When I began working, three in every 100 Argentines lived in poverty. Now that number is 40. We have a massive state that causes a fiscal deficit that can only be financed through printing money, debt or more taxes. The trouble is that we have reached the limit of all three measures. Our inflation is over 100%, so printing more will cause hyperinflation. We can’t borrow more money as we have defaulted nine times and nobody wants to lend to us. And as for taxes, the World Bank calculates that Argentina already has the highest tax burden in the world. So, a change will come regardless of who wins the elections.”
“Macri was not aggressive enough”, says Blazquez. “Now we have the same debate about shock treatment versus gradualism. It sounds strange, but to be aggressive you must be a gradualist. You can’t change so many distortions overnight but you can convince market players that you have a feasible plan. With Macri it was wishful thinking – investors thought that a market-friendly government, coupled with Argentina’s potential, would work out well. Macri ran large fiscal and current account deficits in his first two years but then in 2018 financing dried up because of US interest rate expectations and the trade war with China. That stopped capital inflows, a problem that was exacerbated by the fact that Argentina was relying on hot money, which left very quickly when the country’s prospects worsened.
“The next administration will need a balanced budget”, continues Blazquez. “The fiscal deficit will not change 180 degrees overnight but if the next president demonstrates resolve early and shows the market that there is a credible plan to fix the fiscal situation then I think Argentina can regain market access, which will help it avert default.”
Fabian Kon, CEO of Banco Galicia, Argentina’s largest bank, agrees. “People say that if we implement economic orthodoxy, it will cause a shock. But I think the alternative, which we are living at the moment, is worse. We have 100% inflation, pensioners earning $125 per month considering the free exchange rate, an economy in recession and no employment growth. Yes, the cure will be difficult but when people start to see economic results then they will support it.”
“To really fix our economic distortions we would need to take a decade of hardship and I don’t think the Argentine people are prepared to do that”, says Alan Arntsen, founding partner of Pagbam, a full-service legal firm with offices in Buenos Aires and New York. “That’s why we are a country of extreme cycles because no politician can build consensus for a sustained period of painful but necessary measures.
“The exception was in 1989”, continues Arntsen, “when we suffered brutal hyperinflation and things got so bad that politicians could be persuaded to vote for tough economic measures. That led to a wave of privatisations, a reduction of the state and economic growth and intense deregulation but eventually ended with the 2001 crisis.”
Many interviewees feel that Argentina is on the brink of another crisis. “I think it will get uglier before it gets better”, says Sebastian Haloua, from Fenix Partners, a Buenos Aires-based independent corporate advisory firm. “The macroeconomic imbalances are getting larger. The current government is desperate to make it until elections but I think October is a bridge too far. The peso is going to collapse and inflation will increase. I remember what happened in 1989, when the peso went from 8 to the dollar to 600 to the dollar in one week. Once you lose control of inflation the situation gets worse very quickly. I don’t think things will get that bad this time though.”
Arntsen also believes any crisis now will be less severe. “The situation is tough but you can’t compare it to the last crisis in 2001. On a personal finance level, Argentines are better prepared this time, in terms of their exposure to the peso.” Yet David Cooper, CEO of Cooper Brothers, an insurance loss adjuster that has been in Argentina for more than a century, is more pessimistic. “Given that lots of our economic numbers are already very bad, I would hate to think where a crisis might take us.”
This all makes pretty depressing reading, so congratulations if you made it this far. But your perseverance will be rewarded because, despite the current chaos, Argentina has some world-class investment opportunities that should drive strong growth in the medium term.
Elsewhere in this report we take an-depth look at Argentina’s incredible potential in energy, mining, agriculture and technology. But it’s also worth highlighting the growth opportunities that will come from normalising the economy.
“If Argentina had a conventional economy, then banks could grow exponentially”, says Kon. “In Argentina credit is just 9% of the country’s GDP, compared to 90% in Chile and around 60% in places like Colombia, Peru and Brazil. In Argentina the banks are just transactional as we don’t really provide long term credit. That explains why the Argentine economy can’t grow – its entrepreneurs aren’t able to borrow to fund expansion. It also hits households as there are practically no mortgages in Argentina. Even in the boom of the Macri years we only issued 7,000 mortgages, despite having a base of more than 2 million customers. The high inflation makes issuing credit impossible – imagine taking on a loan with 100% interest.”
Kon’s point is that Argentina doesn’t have to do anything revolutionary – just have a relatively stable, normal economy. Regardless of who wins the election by 2030 – which is the focus of this report – Argentina’s macroeconomic position should be far more solid. The drought reduced Argentina’s agricultural exports in 2023 by $20billion, causing huge liquidity problems for the cash-strapped economy. However, rainfall has returned and agricultural exports will be much higher in 2024. Argentina will also get a boost from new export sectors, says Blazquez. “We will see a massive improvement in Argentina’s energy exports in the coming years. In 2025 there will be a sharp reversal of the current $6billion energy import bill to a $6billion energy export surplus. Argentina has massive oil and gas reserves in Vaca Muerta and is currently building large pipelines to allow it to increase production. Eventually there will be an LNG market, that will allow us to export gas to the world market.”
Blazquez believes that, “if Argentina can become a more ‘normal’ economy, then you will see an appreciation of the exchange rate, so that non-tradeable sectors such as services and real estate will increase. If that becomes a sustainable trend then you can have good rates of returns for many years. Our tech sector is very competitive already.”
It isn’t easy to invest in an economy that is hurtling towards crisis but the rock bottom valuations may tempt some investors. For example, Kon believes that Argentina’s banking sector is cheap right now. “If the presidential primary in August shows that the politicians are willing to change the direction of the economy then you will see share prices in the banking sector increase”, says Kon. “In the past, with more confidence in the Argentine politics and economy, our share price got to $73 at Nasdaq, but after the PASO (primary election) results in 2019, it fell more than 50% in one day. Our market cap, which has been as high as $10billion, is now around $1.7 billion.”
“Valuations in Argentina are incredibly attractive”, says Pérez. “Assets in the country are probably trading for one third of their true value, while returns in some sectors are high. At the moment the Argentine investors are looking for opportunities. When they start to bring back money from abroad to buy businesses and assets here, that will be a sign that the recovery is happening. International investors will be watching for that because they know that the locals understand the country risk far better. So, the local buying spree will be followed by international investors returning to Argentina.”
Marcelo Slonimsky, a Partner at Bourel Paris-Laplace agrees, noting that “savvy investors who are betting on a change in the economic climate and are looking for undervalued assets in sectors with strong fundamentals that will benefit if the economy improves and opens to the world.” Argentina’s return to the global economy is inevitable. As the 21st century progresses the world will increasingly need Argentina’s energy, metals, food and human talent. Meanwhile a new generation of Argentinians has become frustrated with the ‘big state’ economic model that made the country poorer in the 20th century. If properly managed, Argentina’s incredible size and natural resources could boost living standards and expand the country’s much-suffering middle class. It would also create incredible opportunities for brave investors.