Index trend
Previous Quarterly Editions
Expropriation Risk: 64 64 59 60 ►Political Violence Risk:48 48 48 48 ►Terrorism Risk:25 23 23 23 ►Exchange Transfer and Trade Sanction Risk: 73 73 73 73 ►Sovereign Default Risk:74 74 74 74 ►
Overall Risk Temperature: 64 (Significant) TREND ►
Special topic: Relationship with the 'global rules-based order'
President Javier Milei defines himself as an “anarcho-capitalist” and “libertarian.” He has been at constant pains to stress that he is aligned with a Western-based system built on free trade and economic liberalism. Since he took office a few short months ago on December 10, 2023, Milei has been forced to adapt some of his earlier expressed positions. He no longer mentions the possibility of breaking or distancing ties with China and leaving Mercosur (the Southern Common Market), as these actions would have severe domestic economic impacts. Having described the state and its representative bodies as a criminal conspiracy, he promised to take a “chain saw” to the state but has already come up against the contradictions inherent in being a head of state while claiming the state should not exist.
Milei’s maiden speech in Davos, Switzerland, in February offered a dubious overview of global economic history, attacking socialism, climate change theories, “radical feminism” and state regulatory intervention in the economy. Warning that the West was at risk from socialist ideas, Milei claimed that “the enemies are all those where the state controls means of production.” He argued for the severe reduction of the state's role in regulation, service provision and economic activity and defined tax collection as an attack on liberty — despite his own recent attempts to increase taxes to eliminate the deficit.
In theory, his statements should point to a strong commitment to the global rules-based order or liberal international order; however, his commitment to a global rules-based order would be shaken by his enthusiastic embrace of former U.S. President Donald Trump as a key ally (which appears to misunderstand Trump’s own protectionist tendencies). In practice, Milei disdains any domestic rules-based order. He tried to persuade Congress to cede legislative authority to the executive and to govern through a blanket emergency decree that has already prompted legal challenges defining it as unconstitutional. These actions only raise questions over his commitment to rules and to international institutions such as the United Nations and World Trade Organization where he disagrees with their positions.
More concretely, Milei lacks support from the vast majority of Argentina’s provincial governors and has only small blocs of supporters in both houses of Congress, as illustrated by his difficulty thus far in passing his proposed reforms. Far from seeking to negotiate with potentially sympathetic sectors, Milei has repeatedly attacked all political figures who disagree with him or vote against his wide-ranging reform measures, accusing them of treason and corruption. This suggests he is unlikely to implement any significant change to economic policy and indeed risks letting socioeconomic conditions deteriorate. The possibility that he will not see out his four-year term is not inconsiderable.
Milei has only been in power for three months. His results on economic and political measures have been mixed. So, it is very early to determine how strong his purported commitment to the global rules-based order can or will be. Argentina is likely to stay in recession this year. As social conditions deteriorate, protectionist measures, exchange controls and possibly failure to meet external debt repayment obligations will remain risks that would run counter to the concept of the global rules-based order.
Argentina’s long-standing record on that global order is mixed (not least due to domestic economic exigencies that will not be rapidly repaired), and a sustainable and radical shift in policy currently looks unlikely. Having said that, Argentina has a fairly closed economy and relatively little influence or involvement in the global order; any deviation from that order tends to relate exclusively to domestic policies such as trade and exchange controls rather than any attempt to modify external trends. The main impact on Argentina’s economy would likely come from a severe downturn in China rather than changes in the liberal international order, and domestic economic exigencies imply that its focus will remain inward rather than outward.
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Expropriation risk to foreign investors per se is minimal at present. A number of companies have already exited Argentina, and the government hopes to encourage foreign investment. Indeed, Buenos Aires is focusing on privatizing state companies (albeit with limited success thus far, and having reduced the number of companies up for privatization from 40 to only three).
However, in 2023, the U.S. District Court awarded some $12 billion to minority investors in energy company YPF after Argentina expropriated the company in 2012. The ruling is unlikely to be complied with, raising the likelihood of new efforts to embargo Argentine state properties overseas and undermining domestic attempts to improve investor sentiment. The sharp fall in gross fixed capital formation at the end of 2023 points to continuing investor concerns.
Protests have continued since Milei took office despite the introduction of draconian security measures to curb demonstrations. Protests have been relatively peaceful but are likely to increase in the coming months as economic conditions deteriorate and controversies over economic policies deepen. Overall, personal security and the risk of violent crime will remain a key concern, notably in connection with a sharp rise in drug-trafficking-related violence in Rosario, Argentina’s second-largest city.
No major terrorist attack has occurred in Buenos Aires since 1994, and the risk of terrorism in Argentina remains low today.
Central bank reserves have risen since Milei came to office by some $10 billion, reaching nearly $28.2 billion as of March 18. Central Bank purchases have been assisted by the sell-off of dollars by companies and individuals in a context of soaring inflation and devaluation. This implies that much of the reserves target for this year has already been met. Improved harvest prospects this year should also boost dollar inflows; however, the government’s debts to importers remain high, and a likely economic contraction this year will raise doubts about any sustained increase in reserves.
Following a December devaluation, the official Argentine peso (ARS) to U.S. dollar (USD) exchange rate is now around ARS897:USD1, while the so-called blue dollar is currently around ARS1,025:USD1. Much of the fiscal surplus at the start of this year was due to the so-called PAIS tax on foreign currency transactions; this makes it unlikely that the government will lift foreign exchange controls in the coming months even if reserves continue to strengthen.
The International Monetary Fund currently predicts a contraction of 2.5% this year, after a contraction of 1.6% in 2023, which will make it extremely difficult to stabilize the debt position. The main concern will remain a possible default on domestic debt as well as the onerous and short-term conditions on which rollovers are being made. Standard & Poor’s recently downgraded its domestic currency debt rating to “selective default” following a debt swap involving some ARS42.6 trillion in bonds the agency defined as “distressed.”
Although the new government achieved a fiscal surplus in January and February, largely by dint of slashing public spending in such areas as pensions and transfers to provinces, the deteriorating domestic and international environment will make its fiscal targets more difficult to achieve later in the year, and worsening social conditions are likely to harden resistance to compliance.
