Argentina’s economic reforms hold out hope

I RECENTLY visited Buenos Aires for the first time in five years. I noted that the inflation rate was broadcast on TV news daily, indicating high interest in the topic.

At that time, it was running at about 20 per cent per month but coming down. Of course, Argentina has struggled with inflation for a long time. When I was investing in the country in 1989 and 1990, inflation was running at 2,000 to 3,000 per cent per year.

You can imagine how difficult it was to analyse companies on an earnings basis with inflation at the crazy rate. Price earnings (P/E) ratios did not mean anything since the “E” was meaningless. So, we relied on assessing the assets of the companies on a US dollar basis.

Argentina was once one of the richest countries in the world, and Argentinians thus found it difficult to deal with the realities of a lower-growth economic environment. That, combined with the Peronista populist political orientation, resulted in one government after another printing money to satisfy the people’s aspirations with handouts.

Of course, the outcome was hyperinflation, but I was always amazed how people in Argentina adjusted to that kind of environment. One way was, first, to get hold of US dollars and gold. The other way was to buy assets such as real estate whose price would adjust to the inflating currency.

The political ramifications of high inflation are easy to see in Argentine politics with some administrations trying to “massage” the inflation statistics. In my book The Inflation Myth, I talk about how the government of president Cristina Fernandez de Kirchner tried to force the woman in charge of Indec, the agency in charge of calculating the consumer price index inflation measure, to lower the numbers.

The situation got so bad with the Argentina official numbers losing all their credibility, that The Economist magazine, which normally published data for 42 of the largest economies of the world, stopped publishing the Argentine numbers.

The degree of exasperation among the public is reflected in the elections; they elected Javier Milei, a candidate with no strong political party support, as president in December 2023. Milei promised a radical overhaul of the economy to bring inflation down.

He introduced a sweeping programme to deregulate the economy by cutting bureaucracy with “chainsaw austerity”. He claimed that the economy had been destroyed by oppressive legal and institutional structures.

Milei’s measures were aimed at cutting regulations in areas such as housing, export customs, land ownership, food retailers, pharmaceuticals, tourism, and employee severance packages to encourage competition.

Importantly, he introduced programmes allowing state-owned companies, such as the government airline, the YPF energy group and media companies to be privatised. His aim was to dismantle the inflationary regulations introduced by the left-leaning Peronist movement, which had been in effect the previous 20 years.

Of course, there is considerable pushback from the unions and others who had benefited from the inflationary government handouts and sweetheart deals. Milei faces strong opposition in the Argentine Congress with some delegates calling his decrees “abusive and unconstitutional”.

However, the International Monetary Fund, which held US$43 billion of Argentine debt, praised the package. During his campaign for president, Milei appeared quite radical by promising to close the central bank and replace the Argentine peso with the US dollar.

But after being elected, his programme became more moderate. This was necessary in order to attract a wider political base, as his party held less than 10 per cent of the Senate seats.

In March, the senators voted 42 to 25 to reject his sweeping emergency decree, but the decree will stay in effect until it is rejected by the lower house.

While the legislative battle rages, inflation has showed signs of coming down. Importantly, foreign investors are showing increased interest in Argentina.

During my visit, I spoke with various companies from sectors such as real estate, aluminium, banking, and public services. There was a sense of cautious optimism.

People appreciated Milei’s efforts to fix the economy, but they were also realistic about the challenges ahead. It was interesting to see that many businesses were optimistic about the government’s initiatives, but they also understood that not all problems could be solved quickly.

The drastic measures taken by the Argentine government have begun to show some promising outcomes. For the first time since 2012, Argentina recorded a monthly budget surplus in January. There has also been a notable increase in the country’s foreign exchange reserves. These are encouraging signs, but the path to recovery is fraught with challenges.

Argentinians are accustomed to dealing with high inflation and monetary problems and have found smart ways to stay afloat. I was impressed by how people and businesses navigate tough economic and social conditions with such resilience.

The path to economic stability and prosperity for Argentina is undoubtedly long and uncertain. The government’s willingness to tackle difficult economic issues head on and the positive initial results are steps in the right direction.

Popular support for drastic change and the adaptability of businesses to the country’s economic fluctuations are also reasons for cautious optimism.

Only time will tell if the efforts of the new government will lead to lasting economic recovery and growth. But for now, the story of Argentina is one of struggle, resilience, and hope.

The writer is an investment professional with over 30 years’ experience and is co-founder of Mobius Capital Partners