Home » Posts » Market Perspectives »
With Argentina currently experiencing inflation exceeding 210%, Argentinian bonds trading with a yield to maturity of more than 50% several times over the past few years, and a current year-over-year GDP decline of 5%, Argentinian capital markets are among the most volatile globally. To develop an Argentina economics perspective’ of key drivers and pressure points, it is essential to understand the nation’s economic history.
A famous quote attributed to the Nobel laureate in economics, Simon Kuznets, humorously categorizes countries into four types: developed, undeveloped, Japan, and Argentina. It’s not surprising that Argentina stands out as an economic anomaly. In 1895, it had the highest per capita GDP in the world. However, recent data from the National Institute of Statistics (INDEC) reports a poverty rate of over 43%. So, what led to this stark transformation? The current state of the Argentine economy results from a complex interplay of factors that are challenging to explain, but one thing is abundantly clear: politics plays a significant role.
The Economic History of Argentina in a Nutshell
Argentina experienced substantial growth from the end of its civil war in 1852 until the onset of World War I. During this era, a significant wave of European immigration took place, driven by offers of land in exchange for military service in the Argentine army. These immigrants played a pivotal role in the development of ranches dedicated to livestock, wheat, cotton, and various agricultural products. In urban areas, newly arrived immigrants established businesses and engaged in artisanal manufacturing. Meanwhile, British capital investments supported the transportation of commodities and the development of essential public services.
During and after both World Wars, Argentina attempted to industrialize through import substitution policies, supported by revenue from livestock and agricultural production. However, these policies were not well-received by producers and landowners who sought to maintain the previous economic model. Simultaneously, the global influence of communism led to the emergence of armed movements and guerrillas that would eventually clash with the military.
Up until 1983, the subsequent years can be described as tumultuous for Argentina. The country experienced multiple coups and lacked a consistent economic policy. Simultaneously, civil society was caught in a conflict involving guerrillas, successive governments, and the military. This period reached its climax with the restoration of democratic order after a military junta attempted to forcefully reclaim the Falkland Islands (Malvinas).
Despite having restored democratic order, this advantage was not reflected in the country’s economic well-being. Since 1983, Argentina has experienced 3 hyperinflations and 4 defaults and has had to turn to the International Monetary Fund several times. Currently, Argentina is the largest debtor to the IMF. Over the past 60 years, Argentina has gone through 14 recessions and is entering the 15th.
The Current State of Argentina’s Economy
How can an economy operate with an annual inflation rate of 210%, an indeterminate number of exchange rates, capital controls, and bonds carrying interest rates exceeding 60% in dollars? The answer is straightforward: it can’t. These are the harsh realities that define the current state of the Argentine economy, which is projected by economists to experience a 2.5% contraction for the year 2023.
Inflation and Depreciation
The Argentine currency, the peso, lost over half its value in just one year, but this phenomenon is not recent. The peso has accumulated a loss of more than 99.9% over the last decade due to the country’s fiscal needs in a context where there is no access to external credit. In other words, there is a continuous fiscal deficit that cannot be covered through debt and is therefore financed through the central government, sharply increasing the money supply.
As inflation continues unabated, domestic investors seek refuge in liquid assets like the US dollar to preserve their savings. This means that the USD exchange rate reflects future expectations. In other words, it is one of the “thermometers” of the economy. For example, prices for cars and homes are denominated in dollars. Additionally, whenever the dollar rises, producer sales in supply chains come to a halt.
As a result, in recent years, as inflation has multiplied, the US dollar has followed a similar trajectory. In 2016, the exchange rate was 15 pesos per dollar. Currently, the unofficial market has a price of 1,250 pesos per dollar, marking an appreciation of 8,233%. It is essential to note this distinction of the unofficial market versus the foreign exchange market, which does not reflect where goods and services are being sold in USD.
Foreign Exchange Market
The official foreign exchange market has capital controls and was set at a fixed price of 350 pesos per dollar before Milei won. However, almost no transactions occurred at this price. Since Javier Milei’s victory, capital controls have remained in place.
However, the new government is actively addressing the issue of the money overhang stemming from the inability to convert pesos into other currencies. To tackle this, the Central Bank of Argentina is reducing the surplus pesos by exchanging them for dollar-denominated bonds issued by the treasury.
Imports in Argentina are currently restricted by the government to medical equipment and other intermediate components essential for domestic production, pending the elimination of capital controls.
Exporters, mainly agricultural producers, are obligated to sell their dollars at the new price of 870 pesos per dollar to finance imports.
As the real price of a dollar is much higher than the official rate, producers faced an approximate loss of 65% BEFORE taxes before Milei’s victory. For this reason, more and more exporters (agricultural, petroleum, etc.) were reluctant to sell their stocks, smuggling had surged, and a ‘shadow economy’ had emerged.
Currently, conditions for exporters have improved, allowing the Central Bank to accumulate international reserves. However, until the excess pesos are eliminated and capital controls are lifted, the foreign exchange market cannot be fully liberalized. The International Monetary Fund, as auditor of Argentina’s national accounts and creditor, prioritizes the accumulation of dollars for repayment over the liberalization of this market.
Asset Prices in Argentina
Naturally, the past few years the markets have experienced a sharp decline in the prices of Argentine assets, including real estate, bonds, and the stock market. One of the most iconic Argentine stocks is Galicia Bank, a top-tier commercial bank in the country. Its price had decreased by 92% from top to bottom in 2021.
Milei’s victory marked the point where Galicia confirmed the end of the downward trend. Currently, it’s trading at $21, a significant increase from its lows of $6.5.
Real estate has had a similar performance in recent years. The price per square meter for residential properties in Buenos Aires has decreased by 20% since 2020, and currently, there is a significant accumulated supply in the market.
Finally, we must mention that Argentina’s most recent default occurred in 2019. There was a debt renegotiation with private creditors in which new bonds were issued. If we look at their yield to maturity, the returns are still higher than 50%.
However, their current prices, which have fluctuated between 20 and 40 cents per dollar in the last several months, suggest that Argentina will likely default again. In other words, the yield to maturity is virtual, as it does not reflect a refinancing cost but rather the parity per dollar of debt issued.
Last December 10th, Javier Milei assumed the presidency of Argentina. The libertarian president embarked on an ambitious reform plan, currently under legal negotiation in Congress, which, according to the most reliable sources, will likely be approved with some modifications.
Some key points include the privatization of all public companies except Yacimientos Petrolíferos Fiscales (YPF), elimination of export taxes, deregulation of the rental market, indexing of pensions to the inflation rate, among more than 600 articles.
The law also stipulates the declaration of emergency in fiscal, economic, social, and other matters. This will grant the president greater decision-making power without having to navigate through Congress to approve his decrees.
Furthermore, he attended the World Economic Forum event in Davos, where he delivered a groundbreaking and controversial speech. There, he strongly criticized the current governance mechanisms of the West while reaffirming his liberal and capitalist stance to drive Argentina forward.
Milei’s presentation had a distinctly different tone from others, notably combative and critical of the current direction of Western governance. According to Milei, collectivism, the understanding of society as groups rather than individuals, fosters the advancement of socialist and divisive policies.
In other words, Milei criticized current economic policies, emphasizing that social welfare and taxes yield poor results. He was also critical of concerns over climate change, favoring market solutions or increased productivity instead.
Regarding the economy, the new administration’s future policies certainly will impact the trajectory of the current severe economic crisis that can already be classified as hyperinflationary in pesos and deflationary in foreign currencies. According to most economists, Argentina will have to confront a recession in 2024, but asset prices have already experienced strong gains due to a reversal of expectations.
CapitalMarkets.com is managed by individuals who have worked in the capital markets for over 25 years. Contributing writers include professionals and financial journalists with unique experiences across the capital markets.