Argentina: Different course, same challenges
Javier Milei (La Libertad Avanza – LA) won in the run-off by a relatively wide margin and will be the next president of Argentina, as of December 10th, 2023. Milei obtained 55.7% of the valid votes against 44.3% for Sergio Massa (Unión por la Patria – UP), who proposed to work with the president-elect in an orderly transition.
There are expected to be policy changes, but analysts are aware of the political limitations. The support of Juntos por el Cambio (JxC) legislators is a necessary condition to pass legislative forms, but not sufficient, especially considering that the current administration (UP) will have about half of the seats in the Senate (35 out of 72).
What is expected from Milei’s administration?
Exchange rate policy: some analysts expect at least a roughly 80% adjustment of the official FX in December of this year. This move should unlock some pent-up foreign exchange inflows and encourage wheat exporters to quickly ship exports in late December and early January, which could generate inflows of US$ 3 billion. Analysts also expect a new IMF Extended Fund Facility to be negotiated relatively quickly with the IMF, avoiding incurring arrears.
Fiscal policy: Milei has pledged to close the primary deficit next year through substantial spending cuts, including, the subsidy bill, discretionary transfers to the provinces, and a reduction in state-owned enterprise deficits. Recent tax changes (income tax and VAT) are expected to be reversed, which would help improve the fiscal outlook. Analysts forecast that the primary deficit will end this year close to 3% of GDP, and a roughly balanced primary fiscal account next year, which should help reduce monetary emission.
Monetary policy: Economists expect a hike in interest rates to help prevent a further decline in the currency. They consider dollarization unlikely for now, given the lack of international reserves. There could be an attempt to move to a “dual currency” system in which both ARS and USD are legally accepted means of exchange.
As for Treasury debt service, the likely early and successful renegotiation of the IMF program could allow refinancing of principal maturities, although we do not expect positive net financing. Currently, there are net principal repayments of $1.4 billion and interest payments of $3.5 billion due in 2024.
As for bondholders, there is debt service of about $4.3 billion next year ($1.5 billion in January and the rest in July).
However, even with these potential near-term catalysts, the challenges are overwhelming. Looking further into the medium term, it would require a significant shift in sentiment to argue that the baseline scenario should be for no restructuring international bonds. In particular, the assumption of a current account deficit in 2024 despite a better harvest will not be enough to convince the market of a continued ability to pay, particularly ahead of international bond payments that set up to US$5.6 billion in 2025. Broadly negative international reserves and the adverse impact of a possible FX adjustment on external debt are the other key issues, in addition to gauging the extent of political capital amid inflation that is expected to rise much higher. The market must be convinced that the imbalances can be corrected without incident.
International Reserves
Source: JPM