RE: From Blue Board (Brings Balance)20 Nov 2023 18:36
A big thank you as ever, Mr Marroc, for your informed views.
Per Ashmore
In his victory speech, Milei vowed to take drastic measures from the moment he takes office on December 10th, stating that there is “no room for gradualism”. He also pledged that his government will meet all of its commitments and respect private property.
Milei will likely have to adopt a large front-loaded fiscal consolidation to stop the central bank financing (seigniorage) and start accumulating FX reserves, which ended October at negative levels (-USD 11bn). This absence of FX reserves and other liquid USD assets could leave investors questioning whether Argentina can implement dollarization. Relying solely on private sector capital inflows is far from reassuring and will likely result in a highly destabilized scenario, in our opinion. If implemented, the official foreign exchange (FX) rate, currently at ARS 350/USD, is likely to converge towards the parallel FX.Looking at the fiscal picture, Argentina’s public debt is close to 85% of GDP, one of the LARGEST among Emerging Markets (EM) countries (although much lower on a net basis), while its private sector debt was less than 20% of GDP, the LOWEST in EM. Argentina’s external accounts show a similar story. Contrasting with the negative reserves in the central bank, it has net international investment assets of USD 125bn at the end of 2022. Moreover, as much as USD 200bn in cash is estimated to be held by Argentinians in bank safes or ‘under the mattress’. Thus, the private sector believes the government will stop spending (and printing) money like ‘a drunken sailor’, and the government does indeed implement a front-loaded fiscal consolidation, then public debt-to-GDP could decline and private investment has the potential to pick up. However, this ‘tough love’ austerity would be very daunting for the poorest in the first few years, but would pay off later as private sector investments boost employment and productivity, in our view.
Reforming social security will also be required to achieve a sustainable fiscal surplus. If successful, there would be a renewed period of investment inflows that may coincide with a cyclical improvement in the balance of payments as soybean exports recover following a disastrous harvest in 2023 and energy exports accelerate. This would allow for the replenishing of FX reserves as higher GDP growth would likely improve the country’s ability to service the debt.
The main challenge, for this agenda/outlook is policy implementation. Milei will have to rely on Juntos por Cambio’s (JxC) Congress base and will therefore have to share power with a more moderate group. The good news is that JxC has also long advocated for a strong front-loaded fiscal adjustment. The bad news is that Milei will face fierce opposition from the Peronist Party from day one. The Peronists retained a significant share of Congress seats and important provinces, including Buenos Aires..."
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