Over the past year Milei’s government has managed to slash inflation as well as post Argentina’s largest ever annual trade surplus. But can it turn round the industrial downturn it itself unleashed?
It is hard not to be struck, or perhaps dumbstruck, by all the positive economic news recently flowing out of Argentina, one of the world’s most reliable basket-case economies. On January 10, the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, described Argentina’s changes in economic policy over the past year as “the most impressive case in recent history.” From the Spanish news agency EFE:
In a meeting with a group of journalists at the IMF’s headquarters in Washington, Georgieva said that in 2024 “in many countries we have seen a change of gear on the public policy front and the most impressive case in recent history is Argentina, where the effects have been profound, with the implementation of a solid stabilisation and growth program.”
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Argentina is the largest debtor of the IMF and the team of Milei and the Minister of Economy, Luis Caputo, are negotiating with the institution a new program of funds and reforms that will allow it to progressively lift regulations on the use of foreign currencies.
The IMF’s surprise (and no doubt relief) is understandable. Argentina is its larger debtor nation, and, as the Fund well knows, the country’s governments have a long, storied history of defaulting on their debt.
Inflation Almost at Double Figures
Over the past year Milei’s government has managed to slash the monthly inflation rate from 12.8% in November, 2023, to 2.7% in December 2024 [many people, in making this comparison, use the December 2023 reading as their starting point, when m-o-m inflation was at a decades high of 25%. But this is misleading since it was Milei himself who devalued the peso by 50% on December 12, his third day in office, which in turn almost doubled the rate of inflation in just a few weeks].
That said, Argentina’s economy was most certainly in dire straits when Milei took over. Over the previous 12 years it had suffered no fewer than six recessions. For ten months, it had been grappling with rising, triple-digit annual inflation, giving the South American country the dubious crown of having the world’s highest annual inflation rate. That annual rate neared 300% early last year but has since come down, ending 2024 at a still vertiginous 118%.
There is more positive news. On Jan 20, Argentina posted its largest ever annual trade surplus. From Reuters:
Argentina posted a record $18.9 billion trade surplus for 2024, according to official data released on Monday, that largely coincides with libertarian President Javier Milei’s first full year on the job.
Last year’s trade surplus exceeds the previous annual record of $16.89 billion set in 2009, and came in at the upper end of the forecast from analysts polled by Reuters, who expected a figure between $18 billion and $19 billion.
December’s monthly trade balance featured a $1.67 billion surplus, marking thirteen consecutive months that the value of exports exceeded the value of imports. The December data was also well above the $921 million surplus forecast in a Reuters poll.
Since he took office in late 2023, Milei has bet on boosting grains and energy exports along with slashing public spending in a bid to tame runaway inflation in South America’s second-biggest economy.
Admittedly, some of this was down to good luck. In “Vaca Muerta” (Dead Cow) Argentina boasts one of the largest unconventional oil and gas fields on the planet, and Milei’s presidency just happened to begin five months after the first section of the Nestor Kirchner pipeline came on line. The pipeline connects Vaca Muerta with Santa Fe province by way of Buenos Aires province, and is seen as key to boosting the South American country’s gas supplies and lessening the need for pricey imports.
In fact, Argentina hopes to begin exporting natural gas some time this year. The irony is that the Nestor Kirchner gas pipeline involved significant public funding as well as finance from China. As some critics have pointed out, it would probably never have been built under a Milei government. Another reason why Argentina’s trade balance was so positive last year is that Milei’s shock therapy decimated household consumption, which in turn resulted in fewer imported products. In the first half of 2024, the volume of imports fell by 23% year over year.
On Jan 27th, the US ratings agency Moody’s raised the rating of Argentine debt to Caa3, which is still deep into junk territory albeit with a positive outlook (opening the door to more rating increases). According to the agency’s accompanying statement, the rating upgrade “reflects the decisive change in government policies, which has allowed fiscal and monetary adjustments that are helping to address economic imbalances and stabilize external finances, thereby reducing the probability of a credit event.”
Argentina’s country risk rating, tracked by JP Morgan, fell below 600 in January, its lowest level since August 2018. It is hoped that this improved perception of Argentina will help the country to attract overseas investment as well as allow for an eventual return to the global debt markets. The US lender also published a favourable report on Argentina, highlighting its chances of economic recovery as well as a possibility of a further slowdown in inflation.
“Although Argentina stands out as an outlier in Latin America during 2024 … we still see room for valuations to expand, earnings to recover and country risk to decline, in a context where there are still several catalysts that could materialise in 2025.”
One of the most important milestones for the economy was its recent emergence from the sharp recession induced by Milei’s shock therapy. In December it was announced that Argentina’s GDP expanded 3.9% between July and September in seasonal-adjusted terms compared with the previous quarter, marking Argentina’s first quarter of growth since it entered recession in late 2023. Compared with the same period in 2023, GDP for the third quarter contracted 2.1%.
The news seemed to suggest that the economic pain unleashed by Milei’s devaluation of the peso and brutal spending cuts was finally beginning to subside. But as the FT notes, the economy still expected to end 2024 with a contraction of around 3%. Even if it grows by 5.2% this year, as JP Morgan Chase economists are forecasting, it would only return per-capita GDP to the level of 2021, when the economy was emerging from the pandemic. And there are still big question marks about whether it will grow by that much…
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Nick Corbishley 