The votes are in, and Javier Milei is Argentina’s new president. The election made headlines worldwide, as did Milei’s plans to reconstruct the nation’s economy through bold moves like slashing public spending by 15 percent, abolishing the central bank, and switching the nation’s official currency from the peso to the United States dollar.
Milei’s surprise victory in the PASO primaries earlier in the year had ripple effects throughout the economy: stocks and sovereign bonds fell, the value of the peso plummeted, and inflation—already among the world’s highest—jumped even higher. It was an unwelcome blow to a country just emerging from an economically devastating drought with a poverty rate of 40%.
Market reactions after the November 19 runoff were another story. “Financial markets broadly welcomed Milei’s victory, which is likely to usher in a sea change in economic policymaking,” CNN reported. On Monday, November 20, Argentina’s dollar bonds rose, the New York-listed shares of several Argentine companies surged, and banks Banco Macro and Grupo Financiero Galicia gained 20%.
As Argentina—and the world—prepares for Milei to settle into his new role, there’s a feeling that anything can happen.
“He’s a bit of an unknown and it is a little scary, but it’s time to turn over a new page,” one of Argentina’s millions of voters, 31-year-old restaurant worker Cristian, told Reuters as he cast his ballot on November 19.
As the page turns, companies doing business in Argentina are eager for more clarity. Take regulations, incentives, and government programs, for example. How will Milei’s proposed spending cuts affect the many programs, partnerships, and incentives currently supporting technology, especially in key areas like AI?
In previous blogs, we’ve explored opportunities in Latin America’s third-largest economy, from lithium mining to ecommerce. Here’s our take on how the latest change in Argentina’s leadership could impact your business.
Bold ambitions and likely realities
Given Milei’s background as an economist and the many challenges faced by Argentina’s economy, financial policy has been a top focus after the election, specifically the fate of the nation’s official currency.
“He seems attached to economic ideas that are very risky, to say the least – e.g. dollarization,” Filipe Campante, an expert in Latin American politics at Johns Hopkins University, told Al Jazeera. “If he doubles down on them, things risk going very badly. If he changes course and chooses a more orthodox and conciliatory approach, then things could be better.”
Other Latin American nations—Panama, El Salvador, and Ecuador—have taken the dollarization route. One way for Argentina to scrap the peso involves removing exchange restrictions and moving custodianship of the nation’s reserves from the Central Bank to another organization or vehicle, like a special fund based in a foreign jurisdiction such as Switzerland, Ireland, or Luxembourg. While this might provide a channel for paying down the nation’s debt, dollarization comes with a price: increased dependence on the U.S. and decreased ability to determine its monetary policy and terms of trade.
Matt Barlow with the University of Glasgow pointed out in the Global Government Forum that “political opposition and Argentina’s lack of foreign reserves make its chances of happening narrow at best.”
Indeed, big decisions like eliminating Argentina’s central bank, currency, and 15% of public spending are not Milei’s to make alone. “He faces a highly fragmented Congress, with no single bloc having a majority, meaning that he will need to get backing from other factions to push through legislation. Milei’s coalition also does not have any regional governors or mayors,” Reuters coverage of the election pointed out. “That may temper some of his more radical proposals.”
Mixed moods across automotive, ag, oil, and mining
Many business leaders expressed concern in the months leading up to the election. The Buenos Aires Times reported worries in the automotive sector about exchange rates and the nation’s currency, which have a big impact on the import of parts for producing local cars and the import of finished vehicles.
Yet others had a rosier view. “Four sectors make me very optimistic: agribusiness, energy, mining, and digital services.” Pierpaolo Barbieri, founder and chief executive of the internet bank Ualá, said in March.
Milei’s promises, specifically the stability of dollarization and scrapping taxes on agricultural exports, won the votes of farmers across the Pampas. Especially after a punishing multi-year drought, “[these free-market ideas] are just the sort we farmers are looking for,” declared Santa Fe grower Ariel Striglio.
Support was also strong in Argentina’s oil-rich Neuquén province, thanks to Milei’s plans to uncap the nation’s fuel prices, lower export hurdles, and re-privative state-owned energy company YPF SA, shares of which jumped 40% after the election.
Regarding lithium, “his devotion to free markets would no doubt mean less direct state support for a local battery industry — relying instead on tax cuts and more lax labor laws to promote value-added manufacturing in Argentina,” Mining.com reported.
Political shifts vs. pragmatic partnerships
If ties with many nations, like the United States, might strengthen under a Milei administration, will others weaken?
Milei has voiced his opposition to joining BRICS as well as plans to pull out of the Mercosur trade bloc with Brazil. “He’s put Lula, Mexico’s Andres Manual Lopez Obrador, Chile’s Gabriel Boric, and Colombia’s Gustavo Petro, the leftists who run Latin America’s top economies, on guard. Asked how his relations with them would be, he said: ‘I don’t have socialist partners,” the Buenos Aires Times reported.
But where does this leave China? Given how intertwined the two economies have become in recent years, will things grow very awkward very quickly?
One area of concern is the currency swap line between Argentina’s central bank, an institution Milei intends to eliminate, and the People’s Bank of China to avoid a default on Argentina’s IMF repayments. “Who would step into the BCRA’s shoes when it comes to managing the unwinding of the swap line with China?” The Diplomat asked in an in-depth article exploring the situation.
Pragmatism may prevail in the end.
“Maintaining stable trade relations with Argentina aligns with China’s strategic objectives, particularly in securing essential resources like lithium and soybeans from countries that are not closely aligned with the United States. Disrupting these trade ties would not be in the best interest of either party,” the article continued. “Milei’s challenges in addressing Argentina’s multifaceted problems, coupled with China’s interests in maintaining a stable bilateral relationship, suggest that pragmatic considerations may ultimately chart the course ahead.”
Moving forward with your business strategy
Argentina’s unique political and economic situation poses complicated questions. For example:
How does a company design, distribute, and sell goods to customers experiencing triple-digit inflation?
Post-PASO news coverage illustrated what it’s like to be a consumer in Argentina today.
“Moments like Monday heighten a growing reality in Argentina, the Buenos Aires Times reported. “Nobody knows how much things cost in pesos. From one street corner to the next, basic items—like paper towels, diapers, milk, eggs—could cost double depending on the store and day of the week.”
How does a business keep cash flowing when inflation is a moving target—and a target that’s generally moving upward?
Imagine your company’s suppliers raising their prices by 20 percent overnight—and the ripple effect of this happening across the country and across industries. That’s what business owners across Argentina experienced the morning after the PASO results.
“Some stores went so far to suspend sales of products like auto parts and toilet paper until prices show signs of stabilizing in coming days, according to business owners across Buenos Aires,” another article reported. “Others said they couldn’t even get new estimates for shipments or sell dollars on the black market to alleviate the pain, leaving them to guess how high costs will soar and how much to pass onto their customers.”
Yet despite the formidable obstacles, and through changes in presidential leadership, commerce continues. “Argentina always shapes us to have this unique resilience to adapt, be creative with new ideas so we can overcome these huge shocks that crush small businesses,” coffee shop owner Iglesias Molli told the Buenos Aires Times.
How does one navigate currency decisions—dollar, peso, yuan, or all of the above?
With a widening gap between the parallel and official exchange rate, a steadily depreciating peso, and a black market, the financial side of business in Argentina definitely benefits from local knowledge and expertise.
Previous economic battles may hint at what’s to come. In its August coverage, Al Jazeera pointed out that a dollar-peso peg to battle high inflation and rapid depreciation ultimately ended in “an ugly devaluation” in the 1990s. CNBC noted that “After a similar primary election shock result in 2019, bonds and the currency crashed and remain in distressed territory, with the peso now held in check by capital controls the government has been unable to unwind.”
The Brookings Institution reflected upon the administration of Mauricio Macri, a pro-market outsider elected in 2015 as a counter-response to a Peronist government. “Currency controls were lifted to transition towards a floating exchange-rate regime, and after a devaluation, the peso stabilized quickly. Subsequently, the government reached a settlement with creditors who had refused Argentina’s debt restructuring deals from its 2001 default. By doing so, Argentina regained access to international markets, and the central bank was able to accumulate reserves.”
While history never repeats itself exactly, knowledge of it can be helpful for “reading the tea leaves” and planning accordingly.
Taking the next step
For those willing to spot and seize opportunity and able to navigate the challenges, potentially great rewards await. Specialized consultants and advisors can help you explore business opportunities in Argentina—through a new presidential administration and beyond. For more information, contact us.