Over the past year Milei’s government has managed to slash inflation as well as post Argentina’s largest ever annual trade surplus. But can it turn round the industrial downturn it itself unleashed?
It is hard not to be struck, or perhaps dumbstruck, by all the positive economic news recently flowing out of Argentina, one of the world’s most reliable basket-case economies. On January 10, the managing director of the International Monetary Fund (IMF), Kristalina Georgieva, described Argentina’s changes in economic policy over the past year as “the most impressive case in recent history.” From the Spanish news agency EFE:
In a meeting with a group of journalists at the IMF’s headquarters in Washington, Georgieva said that in 2024 “in many countries we have seen a change of gear on the public policy front and the most impressive case in recent history is Argentina, where the effects have been profound, with the implementation of a solid stabilisation and growth program.”
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Argentina is the largest debtor of the IMF and the team of Milei and the Minister of Economy, Luis Caputo, are negotiating with the institution a new program of funds and reforms that will allow it to progressively lift regulations on the use of foreign currencies.
The IMF’s surprise (and no doubt relief) is understandable. Argentina is its larger debtor nation, and, as the Fund well knows, the country’s governments have a long, storied history of defaulting on their debt.
Inflation Almost Down to Double Figures
Over the past year Milei’s government has managed to slash the monthly inflation rate from 12.8% in November, 2023, to 2.7% in December 2024 [many people, in making this comparison, use the December 2023 reading as their starting point, when m-o-m inflation was at a decades high of 25%. But this is misleading since it was Milei himself who devalued the peso by 50% on December 12, his third day in office, which in turn almost doubled the rate of inflation in just a few weeks].
That said, Argentina’s economy was most certainly in dire straits when Milei took over. Over the previous 12 years it had suffered no fewer than six recessions. For ten months, it had been grappling with rising, triple-digit annual inflation, giving the South American country the dubious crown of having the world’s highest annual inflation rate. That annual rate neared 300% early last year but has since come down, ending 2024 at a still vertiginous 118%.
It is, I believe, mainly thanks to this achievement that Milei enjoys broad support despite the economic pain many Argentinians have had to endure since he took office. A year after taking office, Mr. Milei was viewed favourably by around 56 percent of Argentines, according to a poll in December. According to another poll a month later, his public approval had risen even higher, to 65%.
There is more positive news. On Jan 20, Argentina posted its largest ever annual trade surplus. From Reuters:
Argentina posted a record $18.9 billion trade surplus for 2024, according to official data released on Monday, that largely coincides with libertarian President Javier Milei’s first full year on the job.
Last year’s trade surplus exceeds the previous annual record of $16.89 billion set in 2009, and came in at the upper end of the forecast from analysts polled by Reuters, who expected a figure between $18 billion and $19 billion.
December’s monthly trade balance featured a $1.67 billion surplus, marking thirteen consecutive months that the value of exports exceeded the value of imports. The December data was also well above the $921 million surplus forecast in a Reuters poll.
Since he took office in late 2023, Milei has bet on boosting grains and energy exports along with slashing public spending in a bid to tame runaway inflation in South America’s second-biggest economy.
Admittedly, some of this was down to good timing. In “Vaca Muerta” (Dead Cow) Argentina boasts one of the largest unconventional oil and gas fields on the planet, and Milei’s presidency just happened to begin five months after the first section of the Nestor Kirchner pipeline came on line. The pipeline connects Vaca Muerta with Santa Fe province by way of Buenos Aires province, and is seen as key to boosting the South American country’s gas supplies and lessening the need for pricey imports.
In fact, Argentina hopes to begin exporting natural gas some time this year. The irony is that the Nestor Kirchner gas pipeline involved significant public funding as well as finance from China. As some critics have pointed out, it would probably never have been built under a Milei government. Another reason why Argentina’s trade balance was so positive last year is that Milei’s shock therapy decimated household consumption, which in turn resulted in fewer imported products. In the first half of 2024, the volume of imports fell by 23% year over year.
On Jan 27th, the US ratings agency Moody’s raised the rating of Argentine debt to Caa3, which is still deep into junk territory albeit with a positive outlook (opening the door to more rating increases). According to the agency’s accompanying statement, the rating upgrade “reflects the decisive change in government policies, which has allowed fiscal and monetary adjustments that are helping to address economic imbalances and stabilize external finances, thereby reducing the probability of a credit event.”
Argentina’s country risk rating, tracked by JP Morgan, fell below 600 in January, its lowest level since August 2018. It is hoped that this improved perception of Argentina will help the country to attract overseas investment as well as allow for an eventual return to the global debt markets. The US lender also published a favourable report on Argentina, highlighting its chances of economic recovery as well as a possibility of a further slowdown in inflation.
“Although Argentina stands out as an outlier in Latin America during 2024 … we still see room for valuations to expand, earnings to recover and country risk to decline, in a context where there are still several catalysts that could materialise in 2025.”
One of the most important milestones for the economy was its recent emergence from the sharp recession induced by Milei’s shock therapy. In December it was announced that Argentina’s GDP expanded 3.9% between July and September in seasonal-adjusted terms compared with the previous quarter, marking Argentina’s first quarter of growth since it entered recession in late 2023. Compared with the same period in 2023, GDP for the third quarter contracted 2.1%.
The news seemed to suggest that the economic pain unleashed by Milei’s devaluation of the peso and brutal spending cuts was finally beginning to subside. But as even the New York Times reported in December, life is much harder for most people, particularly those closest to the bread line (h/t CA):
While a cascade of brutal cuts to everything from soup kitchens to bus fare subsidies have pushed more than five million Argentines into poverty, they have also helped Mr. Milei make remarkable progress on a daunting task: reining in the world’s highest inflation rate.
As the FT notes, the economy still expected to end 2024 with a contraction of around 3%. Even if it grows by 5.2% this year, as JP Morgan Chase economists are forecasting, it would only return per-capita GDP to the level of 2021, when the economy was emerging from the pandemic. And there are still big question marks about whether it will grow by that much.
Though annual inflation is significantly lower than it was, it is still over 100%. One of the main means by which Milei has reduced inflation is by keeping the Argentine peso artificially high against the dollar. This he has done by draining the volume of pesos from the currency market and maintaining a fixed official exchange rate with the dollar that rises at a rate of just 1% per month. One of the unintended consequences of this policy is that inflation is dollars is rising, making Argentina the most expensive Latin American country in dollar terms. From El País:
Any foreign tourist passing through Buenos Aires can attest to this. Today, having a coffee in a bar in the Argentine capital costs the equivalent of 3.5 dollars, compared to 1.5 dollars in Bogotá or São Paulo or 2.5 dollars in Mexico City or Santiago de Chile.
In a comparison of some benchmark prices, carried out by the journalists of EL PAÍS América, Argentina is the most expensive country in the region. For an hour of parking, a Buenos Aires resident will spend 4.5 dollars per hour, compared to two dollars for a Mexican or Colombian. The pattern is repeated for a litre of top-brand milk or a can of Coca-Cola in the supermarket. The gap is especially wide for a midday menu in a downtown restaurant: 18 dollars in Buenos Aires, compared to an average of seven dollars in the rest of the large Latin American cities. Prices soar even more in the case of clothing, cars or electronics, sectors that in Argentina are very protected from external competition. Argentina’s minimum wage barely compensates for this gulf in prices, since it is only slightly higher than that of Brazil, and is far below that of Chile or Mexico.
Industry and Construction On Their Knees
Some economists are questioning how sustainable Argentina’s economic recovery is. Last year industrial activity in Argentina fell by an eye-watering 9.4% while construction plummeted by 27.4%. It was the worst performance of both sectors in almost two decades. To put that in perspective, the slump in industrial activity last year is roughly three times bigger than the fall in industrial activity registered in Germany (-3.1%). It also exceeds by almost two percentage points the collapse in industrial output Argentina suffered in 2020, when many factories were shuttered for months on end due to COVID-19 restrictions.
Even worse was the situation for construction activity, which plunged by 27.4% in 2024, a significantly worse performance than in the pandemic year of 2020 (-19.5%). In fact, the slowdown in the sector is only marginally smaller than the 28.3% collapse during the 2002 financial crisis, in which many Argentinians lost a significant chunk of their life savings due to the “corralito” measures adopted by the government in December 2001 to prevent an accelerating bank run from destroying the country’s banking system.
The only silver lining is that the contraction in industrial activity may have finally bottomed out; according to a report by the National Institute of Statistics and Census (INDEC), manufacturing activity recovered by 8.4% in year-on-year terms in December after 18 consecutive months of decline. It remains to be seem whether this is merely a dead cat bounce or the beginnings of a more enduring trend reversal.
At a more general level, some are even questioning whether the economy has actually recovered at all. For example, the Spanish economist Eduardo Garzo argues that the official data suggesting that the economy is on the mend derives largely from an accounting adjustment that inflates the value of Argentina’s economic activity:
[T]he balance sheet item that has contributed the most to growth (together with the sum of finance and mining, which is a lot), “taxes net of subsidies”, is not an economic sector, but simply an accounting adjustment made to this type of indicator. The logic is as follows: both GDP and EMAE (the official indicator of economic activity) measure production in monetary terms. They do not measure things, but the monetary value of those things. Therefore, to the wealth produced (gross added value) we must add taxes on production and subtract subsidies on products.
It is easy to understand: if the price of a product is 100, and a 20% VAT is applied, its price will increase to 120. There will still be only one product, but its monetary value will be greater, and the GDP (or EMAE) will increase. And the opposite occurs with subsidies: if the price of a product is 100, but the State withdraws a public subsidy for the purchase of 20, its final price will increase to 120. There will still be only one product, but its monetary value will be greater, and the GDP (or the EMAE) will increase.
Consequently, this accounting adjustment can increase the EMAE without any real change in production. And that is exactly what has happened in a remarkable way during the first year of government, as it has increased several taxes and removed many subsidies. The examples are countless: increases in the PAÍS tax, increases in taxes on the fishing sector, the removal of subsidies for transport, electricity, water, energy, the film sector, etc. All of this has significantly increased the EMAE despite the fact that there is no greater production! It is nothing more than a mirage. Let us remember that its contribution to the growth of the indicator is equal to the contribution of finance and mining together, basically because taxes and subsidies affect many sectors.
That is why the average reading of the EMAE is currently similar to that of a year ago, even though most economic sectors are still in decline, especially construction and industry, which have a very important weight in the economy (though less than the accounting adjustment item). Argentina produces fewer things today than a year ago, except that the increase in taxes and the withdrawal of subsidies create an accounting mirage in the EMAE by increasing the monetary value of this lower production. If we remove this accounting effect, the result is that only 30% of the Argentine economy is above its level prior to the Milei government. With these data it is difficult to say that the Argentine economy has recovered.
The two major sectors that have not just recovered since Milei took over but have actually flourished — finance and mining — are also the two most extractive economic sectors. Not only do they provide little in the way of taxes, they also employ relatively few workers (4% of the total). By contrast, the three major sectors that are currently on life support (construction, industry and commerce) account for almost half (44.5%) of the job market.
Defaults in Agro Industry
Argentina’s biggest export market and source of foreign exchange, meanwhile, is suffering a wave of debt defaults. From EFE:
Defaults on payments, opening of bankruptcy proceedings, temporary suspension of production and layoffs of workers: half a dozen companies have announced decisions of this type in the past week, which has set off alarm bells in the most important productive sector of Argentina’s economy..
Four of these companies have filed for bankruptcy protection in response to their inability to meet their debts, which together amount to some 650 million dollars.
These are SanCor, one of the most recognised dairy product manufacturers in the country; Los Grobo Agropecuaria (grain collection and marketing and sale of agricultural inputs) and Agrofina (production of herbicides, fungicides and insecticides), both from the Los Grobo group; and Surcos, dedicated to the production of fertilizers and herbicides.
Although each case has its own particularities, they have occurred against a complex backdrop for the local agricultural sector, with high tax pressures and limited profit margins, still reeling from the severe drought of 2023 and the profound changes following the arrival of Javier Milei to the Government just over a year ago.
In 2024, in the context of Milei’s adjustment plan and the general decline in consumption, demand for agricultural products decreased.
In addition, many designed their business plans for 2024 with the expectation of a strong devaluation of the Argentine peso that ultimately did not transpire.
“The agricultural sector is in a bad state due to a ‘perfect storm’ of adverse weather factors, low international prices, a flat exchange rate and export taxes, which are now going to fall,” Leonardo Piazza, director of the consulting firm LP Consulting, told EFE.
As if that were not bad enough, Argentina’s industrial sector now faces the grim prospect of the Trump administration imposing 25% tariffs on all imports of Argentine steel and aluminium. Last year, Argentina exported $600 million of steel and aluminium to the US, and its steel sector is already reeling from the sharp downturn in the country’s construction industry.
Argentina could also be among the economies most impacted by Trump’s announcement this week of reciprocal tariffs on any countries that impose tariffs on US goods. Trump is imposing reciprocal tariffs on Argentina for two main reasons: Argentina’s tariffs on US products exceed 10%, and Argentina had a small trade surplus with the US last year of $228 million. “We have a small deficit with Argentina, as with all countries,” Trump said at a White House press conference, justifying the protectionist measure.
The irony is that Argentina has maintained a clear trade deficit with the US over the past decade, and the only real reason why it reverted to a surplus last year is the brutal recession unleashed by Milei’s economic shock therapy which prompted imports from the US to collapse by 28%.
These tariff moves by Trump are, of course, deeply embarrassing for a Milei government that has forged close ties with the Republican leader and bent over backwards to align Argentina’s foreign policy with the US and Israel.
Over the past 14 months it has bought hundreds of millions of dollars of second-hand F-16s from Denmark as well as run the gauntlet of Russian ire by pledging to send military aid to Ukraine. It has also provided full-throated support to Israel’s genocide in Gaza, set up a joint US-Argentine military base in Ushuaia, at the gateway of the Antarctic, and authorised the installation of American military personnel in the Rio Paraná-Paraguay, Argentina’s most strategically important waterway.
It was hoped that these commitments and gestures would provide some relief from Trump’s tariffs for Argentina, but seemingly not. At the same time, the New York judge Loretta Preska continues to order the seizure of hundreds of millions of dollars of Argentine government assets held abroad due to claims on unpaid debt from investor holdouts.
Milei is scheduled to visit Washington next week to discuss a possible free trade agreement with the US, and the Argentine leader has even posited withdrawing Argentina from Mercosur in order to consummate that agreement. If that were to happen, the result could be the disintegration of Mercosur, which in turn will spell the end of the multi-decade trade negotiations between the trade bloc and the EU. It would also have far reaching implications for Argentina’s relations with Brazil, its largest trade partner. And that is probably the last thing Argentina’s industrial sector needs.
