Argentina

Agreement with the IMF - important milestone for Argentina's resurrection

The pre-Easter treat took place in Argentina on 11 April. After months of negotiations with the Argentinian government, the International Monetary Fund gave the green light for a new loan package totalling USD 20 billion. The World Bank and the Inter-American Development Bank also announced support totalling USD 12 billion and USD 10 billion respectively. This is an important vote of confidence from the multilateral institutions in favour of President Javier Milei's reform course. In a televised address to the Argentinian people in the evening, Milei celebrated the agreement and himself accordingly. On X, Deregulation Minister Federico Sturzenegger even compared the significance of the agreement to the fall of the Berlin Wall.

Capital controls abolished, exchange rate made more flexible

Milei bought the financial injections that were urgently needed in view of empty (foreign currency) coffers with considerable concessions on foreign trade liberalisation, which he had vehemently rejected until recently, at least for this year. The capital controls in place since 2019 to protect the Argentine peso, which was latently threatened by a fall in the exchange rate, were largely abolished last Monday. Since then, Argentinian private individuals have once again been able to exchange unlimited amounts of pesos for dollars instead of the previous limit of 200 dollars per month. Foreign companies can once again transfer profits to their head offices abroad starting this financial year. In addition, the exchange rate regime was made more flexible on Monday: The peso can now fluctuate freely against the dollar within a range of 1000-1400 pesos per dollar. In future, this range will also be extended by 1% per month on both sides. Prior to the announcement of the agreement with the IMF, the official exchange rate on Friday was 1074 pesos and the unofficial ‘Dollar Blue’ was 1365 pesos. After the market opened on Monday, the official exchange rate rose to 1200 pesos, while the unofficial rate fell to 1270 pesos. The devaluation of the peso was thus limited, and the new ranges were not tested by the markets, which can be seen as a sign of confidence. The Argentinian stock market index Merval rose by an above-average 5%, which speaks in favour of the growth prospects for the Argentinian economy.

Milei, who describes himself as an anarcho-capitalist, had previously avoided these liberalisation measures like the devil avoids holy water. However, this was for political rather than economic reasons. Congressional mid-term elections will be held in Argentina in October, in which around half of the seats in both chambers - the National Assembly and the Senate - will be up for grabs.

Milei, who so far only has around 10% of seats in both chambers with his party ‘La Libertad Avanza’ (‘Freedom Advances’), is hoping for an election victory and thus more support in Congress for further reforms, of which he says he has 3,000 in his quiver, particularly in the overdue structural reforms, for example in taxes, the pension system and labour law. Milei was keen to avoid the likelihood of higher inflation in this election year as a result of foreign trade liberalisation for fear that this could damage his credibility and reputation with voters.

Opportunity for more investment, ratify EU-Mercosur agreement now

Now the IMF has forced Milei's hand. With the removal of capital controls and the flexibilisation of the exchange rate, important obstacles to Argentina's economic recovery have been removed. Despite tax incentives (‘RIGI’), international investors have so far been reluctant to make concrete commitments in Argentina, even though the country has attractive resources in the energy sector (gas, hydrogen) and in raw materials (lithium, copper). Large, and even more so medium-sized, companies have felt deterred by the foreign trade restrictions, despite a fundamental increase in interest in Argentina since Milei took office.

This makes it all the more important to ratify the EU-Mercosur agreement as quickly as possible so that Argentina and Germany (as well as the other countries in both regions) can fully utilise the opportunities for trade and investment. Both countries have a key role to play in the ratification process. Argentina, because it should recognise that the EU-Mercosur agreement and the free trade agreement with the USA sought by Milei are not mutually exclusive, but can rather complement each other in a meaningful way for more growth and investment in Argentina. Germany, because the new German government should use diplomatic channels to try to persuade France, the fiercest critic, to approve or at least abstain from the agreement, and if this is not possible, to secure a qualified majority in favour of the agreement in the EU with the free trade-oriented member states. Particularly in geopolitically and geoeconomically uncertain times, Germany needs new friends in the world and can find them in Argentina and the other Mercosur countries.

Dollar weakness could curb inflation

Remarkably, the recent trade policy turbulence in Washington could help to limit the political risk of the agreement with the IMF, which Milei fears so much. In recent days, the dollar has lost much of its confidence in response to the trade war triggered by Donald Trump and has therefore also lost importance as a safe haven currency, for example compared to the euro or gold. The appetite of Argentinians to acquire unlimited dollars following the abolition of exchange restrictions is therefore likely to be limited, as is the risk of a significant rise in inflation. Although inflation rose again slightly in March compared to the previous month (3.7% compared to 2.4%), primarily for seasonal reasons, on an annualised basis this still corresponds to a fall in inflation to 56% compared to 211%, which Milei inherited from the previous Peronist government in 2023.

Milei's most important task over the next few months until the elections in October will now be to implement the IMF & Co's steep lead in such a way that the economic improvement that began after last year's recession reaches the broad majority of the population. Initial signs are hopeful: the poverty rate has recently fallen to 38% and is therefore below the level inherited from the Peronists despite Milei’s ‘shock therapy’.

Continued broad support for Milei's economic course

Recent polls by Analogiás Consultora (even before the IMF agreement) show that, despite the tough austerity measures and still challenging economic situation, around 40% of the population support Milei's course and his party ‘La Libertad Avanza’ is on a par with the Peronist opposition in the forecasts for the congressional elections at around 30%, meaning it is likely to make significant gains in seats. However, the polls also show that Milei's reputation has suffered as a result of the unnecessary ‘Libragate’ cryptocurrency scandal in February, for which he now has to justify himself in a congressional committee of enquiry. A slight majority of 52% of the population believes that the government suffers from corruption problems. According to a CEOP survey, the majority of Argentines also reject Milei's ‘culture war’ at home and abroad, which was most recently represented again during his appearance at the World Economic Forum in Davos in January.

All the more reason for Milei to now concentrate fully on the most pressing economic problems for Argentina's resurrection instead of trying to explain the world as a messiah.