Argentina Notes - December 2023
Many analysts, myself included, think Javier Milei is going to be terrible for Argentina. But....
Carlos Menem inherited an economic crisis and proceeded to implement massive and painful austerity measures. He created a manipulated currency system, set the country on an unsustainable fiscal path, trafficked weapons to terrorists and engaged in mass corruption in the process. The Menem policies set Argentina on a path to the 2001 economic and political crash that ranks as one of the worst in the hemisphere's history.
If you had invested in Argentina around the start of Menem's term, right when the economy bottomed out, you'd have made a lot of money.
Nestor and Cristina Kirchner burned international lenders. They put the country on an absolutely unsustainable spending path that is the root cause of at least two (maybe three) separate economic declines this century. In the process, there was corruption and money laundering that enriched their family.
If you had invested in Argentina around the start of Nestor Kirchner's term, right when the economy bottomed out, you'd have made a lot of money.
In the past few months, I've been quite pessimistic about the prospects for a Milei government. His spending cuts are unrealistic and politically unsustainable, likely to harm the poorest Argentines and drive protesters to the streets. His dollarization plan simply doesn't add up without the resources to pull it off. He doesn't have any serious plan to pay back Argentina's massive levels of debt to the IMF, China, and private investors. He lacks a legislative coalition or a party at the local level to help him mobilize support and implement policies. He's also a bombastic and unstable individual who seems likely to be a poor country leader.
Yet, through some combination of luck and skill and a century-long boom/bust cycle that goes well beyond any single term in office, Argentina's worst leaders have far too often benefitted from an economic boom before the bust. For all the challenges Milei faces, including the giant pile of debt and an unstable currency, he is also entering office on the brink of an energy transition that will require Argentina's minerals and a continuing high food price environment that should benefit its farmers. He could do everything correctly and fail or do everything wrong and succeed in spite of himself because of all the factors outside of his control.
I write about political risk and I'm not qualified to give investment advice, so don't take anything I'm writing here in that way. That said, even as I can't sketch out a long term positive scenario under President Milei, I'm forced to believe that someone is going to make a whole lot of money investing or speculating on Argentina in the short to medium term in the coming years.
Milei's moderate turn post-election is the least surprising development because it feels like every Latin American leader elected from the extremes has done the same in the past six years. He'll have a moderate cabinet, reach out to opponents to form a coalition, and will try to pass the more realistic parts of his agenda (along with a big privatization push). Dollarization and the chain-sawing of the Central Bank are off the agenda for a few months.
Moderation, however, hasn't worked out for some leaders in Latin America and hasn't stuck for others. Boric is mired in high disapproval ratings with little to show for his agenda. Petro turned against the moderates, fired them from his cabinet, and broke with many of the parties in his legislative coalition. Bolsonaro kept a pro-austerity Guedes around in the cabinet but overruled his finance chief to break the bank. Castillo broke with everyone, attempted a coup, and was tossed out of office. And in the US, Trump now hates all the remotely responsible people he allowed into his government during the first term. Career radicals who turn moderate only do so temporarily and with half a heart.
The fact Milei will moderate and listen to Macri in the opening 100 or 200 days is certain. The question everyone should ask themselves is where Milei is one year from today. How long does it take him to break with the moderates and political institutionalists? What gets done in the early months and does it hold? How bad is that break and does it lead to political disaster or just political malaise? The details of the moment in which Milei stops being moderate will be a defining question for the term in office and analysts should be gaming out the scenarios of what it might look like.