Dec 26 / Alef Dias

Macroeconomics Weekly Report - 2023 12 26

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Argentina: Market excited with reforms, but challenges remain

  • Over the last two weeks, Argentina has been in the macroeconomics headlines with the first economic measures of the new government. The direction of economic policies has so far been in line with what the market sees as necessary to adjust the severe imbalances present in the Argentine economy at the moment.

  • The fiscal deficit - the main problem to be solved - has already been addressed, and now the implementation of the fiscal adjustment must be followed closely.

  • The exchange rate distortion was also tackled, with caution due to the shortage of foreign exchange reserves in the country. In the monetary sphere, the change in the policy rate could result in additional inflationary pressure, although it is recognized as an important operational adjustment.

  • Now, the market's focus should be on the speed with which the reforms proposed by the current government will be implemented and the resistance that may arise in relation to these policies. This scenario should play a significant role in the pricing of Argentinian assets in the coming months.


Over the last two weeks, Argentina has been in the macro and grains headlines with the first economic measures of Javier Milei - the new president who took office on December 10th. This report will analyze these measures, with a focus on understanding how they should impact the commodities markets in the medium and long term.

First wave of adjustments: spending cuts and currency devaluation

The new government's first measures, announced on the 12th, focused on currency and fiscal issues. The newly inaugurated administration weakened the official exchange rate to 800 pesos per dollar. Before the change, it was 366.5 pesos per dollar, which means a devaluation of 54%. From now on, the central bank will aim for a monthly devaluation of 2%.
On the fiscal side, the government plans to cut spending equivalent to 2.9% of GDP. Cuts in energy subsidies will save 0.5% of GDP, while reductions in transportation subsidies will save 0.2%, according to government estimates. The government also expects reductions in social security and pensions to save a further 0.4% of GDP. The government also plans to end the indexation of pension payments.
On the revenue side, the government plans to increase its income by 2.2% next year. One of the main tools for achieving this result should be taxing the import and export of products. This should further discourage imports and transfer part of exporters' gains from a weaker exchange rate to the public coffers.
In the weeks before the devaluation, exporters had been converting their profits at a different exchange rate - the average between the official and parallel rates, so the impact of the devaluation shouldn't be as dramatic for them as it is for importers.

Image 1: USD/ARS - Official exchange rate and Blue Peso

Source: Refinitiv

Image 2: US Dollar Index (DXY)

Source: Bloomberg

Monetary policy: confidence in fiscal and exchange rate adjustments allows operational change

On the 19th, the Central Bank of Argentina (BCRA) announced a change in its reference rate for monetary policy. The BCRA now uses the one-day repurchase rate as its policy reference and announced that it will no longer auction the 28-day Leliq bonds it had been using to absorb market liquidity. The Leliq rate - the official policy rate until then - is 133%; the one-day repurchase rate was reduced from 126% to 100% on December 13.

The central bank also cut the minimum rate that banks must pay customers on 30-day deposits to 110%, from 133%. This compares with annual inflation of 160.9% in November and a median forecast of 226.7% over the next 12 months, which implies negative real returns for depositors.

The measure appears to be another step towards encouraging banks to direct their depositors' funds into government-issued bonds, rather than leaving them with the central bank. This would improve the BCRA's balance sheet - by reducing liabilities - and the government's chances of financing its deficit on the market, rather than by issuing currency.

There are risks in this strategy. It depends fundamentally on the market's confidence in the government's ability to fulfill its fiscal plan. If banks are suspicious of the public sector's creditworthiness, they may continue to place clients' funds in one-day repurchase agreements. Negative real rates for depositors could also fuel a run on the dollar - which could weaken the parallel rate - unless investors are convinced that the currency is likely to strengthen substantially over time. They could also further accelerate inflation.

Image 3: Change in monetary policy rate – Argentina (%)

Source: Refinitiv

Liberalizing reforms and resistance to them

In addition to the changes in economic policy, Milei announced last Wednesday an initial list of 30 policies - which are part of a larger list of more than 300 measures - whose main focus is to reduce the role of the state in Argentina's economy.

Wall Street applauded the first batch of reforms, with big banks encouraging their clients to buy the country's sovereign bonds. Despite the optimism about these reforms, it is necessary to monitor their implementation and how far he can go in implementing his plan by emergency decree.

What is certain is that he will face opposition in Congress, where he does not have a majority, even with the combined votes of the pro-business coalition that is likely to support him. In addition, some of the measures and the decision to legislate by decree are likely to be challenged in the courts, and the opposition has already begun organizing demonstrations against his policies.

Image 4: Argentine Debt Bonds - Different Maturities

Source: Bloomberg

In Summary

The direction of the economic policies of Javier Milei's government is so far in line with what the market sees as necessary to adjust the severe imbalances present in the Argentine economy at the moment. The fiscal deficit - the main problem to be solved - has already been addressed, and now the implementation of the fiscal adjustment must be closely monitored.

The exchange rate imbalance was also addressed, and with the necessary parsimony given the lack of foreign exchange reserves afflicting the country. On the monetary side, the change in the reference rate could bring additional inflationary pressure, even though it is an important operational adjustment.

Now, the main focus of the market should be on the pace of implementation of the current government's reforms and resistance to them. This should greatly dictate the pricing of assets in the country over the coming months. In the short term, greater exchange rate competitiveness should boost Argentina's grain exports, even if the increase in taxes on these exports takes away some of this competitiveness.

Image 5: Argentine inflation (%)

Source: Bloomberg

Weekly Report — Macro

Written by Alef Dias
Reviewed by Pedro Schicchi


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