Argentina: New regime opens door for a better outcome
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Argentina: New regime opens door for a better outcome

Key takeaways:

  • Argentina elected Javier Milei to address its latest economic crisis. He promises to radically reform current institutions.
  • Investors will want to see an improvement in government credibility and commitment to fiscal and monetary adjustments.
  • This crisis is not unique and solutions exist. We’re hopeful that Argentina will reach a turning point.

New President Javier Milei has vowed to tackle Argentina’s economic crisis

Argentina is in crisis. An unsustainable fiscal position triggered an inflation crisis, fed further by a lack of credible monetary policy. An unsustainable external balance triggered negative net reserves. As a result, Argentina’s poverty rate is 40%, which is four times that of its neighbor Uruguay. Argentina just elected Javier Milei on an ambitious reform platform. Milei’s election starts a new economic experiment: he’s stated he wants to dramatically cut government spending and dollarize the economy.

As a result of previously failed policies, investors have lost faith in Argentina as a borrower. The government’s dollar denominated debt trades around 30 cents on the dollar, implying an imminent restructuring. There are a few key policy corrections we want to see to regain confidence in the Argentina story. Credible fiscal policy is the first. Argentina cannot afford the current level of spending and needs a policy adjustment to run smaller, sustainable fiscal deficits. The International Monetary Fund (IMF) estimates an average deficit of -5% of GDP over the past five years, largely financed by external borrowing and the central bank (October 2023 World Economic Outlook, IMF). The government need to commit to fiscal austerity. To slow inflation, Argentina needs a credible monetary policy framework. Part of this will need to be better foreign exchange management. Milei’s proposal is to dollarize the economy, one of the few things Argentina hasn’t tried yet on this front. This discussion is quite radical with only a few countries having done it, such as El Salvador, Ecuador, and Panama. Argentina is up against a multi-dimensional problem and all these issues will need to be attacked simultaneously.

Milei is proposing a radical reworking of the system. This requires buy-in from Congress, where Milei does not have a majority coalition. The Argentine population also needs to be willing to undergo the adjustment. The IMF is another important player as Argentina’s single largest creditor. Part of the fiscal solution will eventually require a restructuring of their sovereign obligations, and all creditors will need to make concessions – the IMF, China, and the private sector. Success begets success, and an improvement in government credibility will lead to more support from the IMF.

In the short-term, Argentine citizens will bear the costs of these reforms. A fiscal adjustment will likely result in a recession, a weaker social safety net, and higher poverty. Argentina’s crisis is not unique: many emerging market countries have successfully navigated similar crises. Latin American crises in the 1980s and Russia in the 1990s offer a few examples. The policy toolkit is well known at this point, which is why elections present an opportunity for a turning point. Dollarization is a high-risk experiment, with uncertain outcomes for private creditors. I expect Argentina eurobond prices to rise at the early stages of this experiment as initial policy announcements and adjustments are made. After two lost decades, we’re hopeful that Argentina won’t see a third.

14 décembre 2023
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Argentina: New regime opens door for a better outcome

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In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

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Risk Disclaimer

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

 

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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