Argentina: President Milei is now in office

Newly elected Argentinean President Javier Gerardo Milei took office on Sunday, December 10 with one of the highest approvals ratings in the country’s recent history. Milei received 56 percent of the votes cast in the second round, in November. Surveys conducted a few days ago show an acceptance rate of his proposed policies close to 70 percent country wide – indicating broad approval of his goals that will be critical for the reform program he intends to implement.

After the inauguration ceremony, President Milei delivered a 34-minute speech to an audience outside the National Congress building, rather than indoors before the general assembly of congressmen as is customary. He described in great detail the distressed economic situation of Argentina and promised to address it with swift, sweeping measures, rather than with a gradualist approach such as that taken by President Mauricio Macri (2015-2019).

President Milei stressed that Argentina is on the brink of hyperinflation (more than 50 percent per month). Notably, throughout history, inflation in Argentina has risen consistently and significantly; the average annual inflation rate since 1810 (when Argentines took over the country after Napoleon invaded Spain) has been north of 50 percent.

The previous administration increased the country’s fiscal deficit significantly. In one fiscal quarter, its policies added the equivalent of 1 point of GDP in expenditures, or 4 points of GDP on an annualized basis, which left Argentina at the verge of collapse. The Central Bank is insolvent, with negative reserves of US$11.285 billion as of December 8. Argentine banks stopped lending to the private sector decades ago, and most of their deposits are invested in lending to the Central Bank for an amount close to US$30 billion at the unofficial FX rate (1,000 pesos per US dollar).

More importantly, amounts due to importers are in excess of US$30 billion, and the Central Bank is not selling dollars at the official rate of 350 pesos per dollar to importers. Some companies have opted to pay for imports using the blue chip swap (spending around 1,000 pesos per dollar to purchase dollar-denominated bonds in Argentina and subsequently selling them for dollars in the US).

The new administration will face international debt payments to the IMF and the bond market for around US$4.3 billion before the end of January 2024. The debt service payments to bondholders will be close to US$10 billion in 2025 plus US$3.5 billion to the IMF (in addition to the peso and dollar-denominated local indebtedness which could be unilaterally rolled over by law in cases of economic crisis, unlike the debt governed under New York law). Argentina’s debt to GDP ratio is around 89 percent, which is not excessive. However, its bond values are at an all-time low at the mid-twenties and low thirties, competing with Ukrainian bond prices. At current yields, financing to Argentina is not an option. The country needs a massive rate compression to successfully implement a liability management transaction in 2025 with its international bondholders and avoid a another default.

Plans and first steps

On his first day in office, President Milei reduced the number of ministries from 22 to 9. He additionally announced a plan to address crime and improve security, particularly in the cities most affected by drug cartels.

Further, he appointed members of his cabinet, among them:

• Patricia Bullrich as Minister of Homeland Security. Bullrich had served in that role under President Macri and was one of President Milei’s competitors in this election.
• Luis Caputo as Minister of Economy. Caputo has a bond trading background and served as deputy chief of Deutsche Bank in Argentina and as governor of the Central Bank and Minister of Finance during Macri’s presidency.
• Santiago Bausili as Central Bank Governor. Bausili served as Secretary of Finance under President Macri, after spending two decades working at prominent international banks in New York and Buenos Aires. DLA Piper Argentina acted as counsel to Bausili for the first time in 1998 when he retained us to place a 144A/Reg S bond for the Province of Buenos Aires under its US$3 billion MTN Program. We subsequently worked with him for the Province of Mendoza’s debt exchange, the chapter 11 restructuring of MetroGAS, and the US$18 billion debt exchange for the Republic of Argentina, among other matters.
• President Milei said he intends to significantly reduce the current fiscal deficit, around 5 percent of GDP or US$25 billion. The financial deficit amounts to another 10 points of GDP, according to the President. He referred to the expected monthly inflation of 20 percent to 40 percent for December and January, based on independent economic predictions.
• President Milei also intends to privatize most companies under the control of the federal government, eliminate subsidies, and reform the administration to improve efficiency and eliminate interference with private investments. He repeatedly expressed his intent to be a close ally of the US and Israel. During the campaign, he pledged not to interfere with bilateral trade with any country as long as such trade is conducted by private parties without any government participation.

Going forward

While President Milei’s objectives remain challenging, most Argentines appear to support his proposals – and the pragmatic alliances he has already made may help his reforms move forward. He expressed that the results of the reforms should be visible within 18 months.

Will his plans be implemented? Or will Congress block his key initiatives? In the coming weeks, we will know more.

To learn more about these ongoing developments in Argentina, please contact Marcelo Etchebarne, Country Managing Partner, DLA Piper Argentina.