Rebirth of free markets in Argentina

January 2025  |  EXPERT BRIEFING  | FINANCE & INVESTMENT

financierworldwide.com

In Argentina, one year ago, the Peronist candidate Sergio Massa, who was also the incumbent minister of the economy, won the first round of the presidential elections held on 22 October 2023. Massa led with 36.7 percent of the vote. He was followed by the libertarian candidate Javier Milei, who secured 30 percent of the vote. Patricia Bullrich came third with approximately 23.8 percent. The results set up a runoff election between Mr Massa and Mr Milei scheduled for 19 November 2023.

Alberto Fernández, the former president, elected Mr Massa to the Ministry of Economy in July 2022 to stabilise the country’s deteriorating economy. Mr Massa’s background and track record could make anyone a little sceptical – he had been mayor of the city of Tigre and the only degree he had obtained was a law degree at the age of 41. Mr Massa was appointed by Mr Fernandez with one mandate: control the most endemic problem of Argentina, inflation. Mr Massa did not succeed. Instead, Argentina experienced a notable rise in monthly inflation during Mr Massa’s term (from July 2022 through December 2023). The rate of inflation increased in the second half of 2022, reaching a year-end annualised rate of approximately 94.8 percent by December 2022; and inflation continued to climb in 2023. By October 2023, the year-on-year inflation rate had surged to nearly 142.7 percent, and it spiked sharply to 211.4 percent by the end of 2023.

Despite all this, Mr Massa led the presidential election, and it appeared likely that he would win the presidency. Mr Massa was the candidate of the establishment. All the media and polls portrayed him as the inevitable winner. His proposals were largely the same policies Argentina has been applying for 70 years: bigger government, bigger taxes, control of the media and a controlled economy.

The other candidate, Mr Milei, was an eccentric economist who became very popular on TV shows in 2017 for what some consider radical views.

During the pandemic, and probably because of the pandemic, Mr Milei’s views on several topics became ever more popular. In October 2020, amid the harshest pandemic restrictions in the world, Mr Milei celebrated his 50th birthday in a public park. The event, and the following it generated for him, triggered a desire within Mr Milei to enter the political arena.

Immediately thereafter, Mr Milei began his campaign to enter Congress as a representative for the city of Buenos Aires in the elections of October 2021. His campaign, with almost no budget, was based on running economic classes in public parks, where Mr Milei recited his mantra: “Liberalism is the unrestricted respect for the life projects of others; founded on the principle of non-aggression and the defence of the rights to life, liberty and property. Its institutions include private property, free markets without state intervention, free competition, division of labour, and social cooperation; where one can only succeed by serving others with better quality goods at lower prices. Thus, those who succeed are social benefactors.”

In the 2021 mid-term elections he only got 17 percent of the votes. Most of the media believed Mr Milei was a ‘flash in the pan’ whose popularity would soon fade out.

He did not, however, alter his rhetoric or his position on issues, including the economy. Mr Milei is an outsider who, through his effective use of social media, was able to communicate directly with the people. During the presidential campaign in 2023, he promised to eliminate inflation, ‘dollarise’ the economy and close the central bank. At the helm of his own political party – Mr Milei did not engage with any of the traditional political parties – he was elected on a platform that promised radical economic reforms, a significant reduction in state influence, and a pro-business, anti-establishment stance.

In just 10 months since his election – he won the runoff election of November 2023 by a landslide – the most prominent stock market index (Merval) went up 221 percent, Argentine bonds that traded at 25 cents to the dollar in December 2023 began trading at 70 cents to the dollar, inflation, which in December 2023 had been 25 percent, in October 2024 was 2.7 percent and the dollar rate which was (unofficially) AR$1300 to the dollar, fell to AR$1110 to the dollar.

Under Mr Milei’s government, Argentina has undergone profound political and economic shifts, marking a stark departure from the previous administration’s policies. His agenda has promoted ideas that challenge traditional governance structures.

Arguably the most important aspect of Mr Milei’s initial economic policy has been to eliminate the country’s fiscal deficit and create a fiscal surplus. Within a month of taking office, he took the fiscal budget from a 5 percent deficit to a small financial surplus. Mr Milei is committed to a fiscal surplus, and from this standpoint, he plans to begin reducing taxes, as he did in September 2024 with the reduction of the ‘PAIS Tax’ which will be eliminated in December 2024. This caused the country’s risk index to fall from 2700 basis points in December 2023 to 745 in November 2024.

Mr Milei is also committed to drastically reducing the public sector, hence the deficit seen in the Treasury. The Milei administration has identified multiple government departments and public institutions for downsizing, and over the first 10 months of his presidency, Mr Milei implemented budget cuts and scaled back on public sector hiring, aiming to curb public spending and reduce Argentina’s fiscal deficit.

These austerity measures were met with strong opposition from labour unions and the Peronist Party, which still controls the majority of Congress. Despite these oppositions, Mr Milei’s administration maintained that reducing the size of government was essential for stabilising the economy and fostering a more competitive business environment.

In the first months of government, these austerity measures worsened the country’s recession. However, the economy, which seemed to hit bottom in April 2024, is seemingly on the road to recovery, with sectors beginning to see more and more activity.

Austerity initially worsened the recession but three factors have contributed to the beginnings of a virtuous cycle of vigorous growth. First, the enactment of the omnibus law called ‘Bases’ which, among many other things, created an incentive regime with lower taxes for large investments. Second, a large tax amnesty allowing Argentine taxpayers that left the tax system under the Fernandez/Massa regime due to the harsh exchange controls to re-enter the system with no fiscal costs. This amnesty has already seen around $20bn in cash declared. And third, an aggressive deregulation agenda, rolling back many labour and business regulations led by the newly created Ministry of Deregulation.

In foreign policy matters, Mr Milei’s views are also distinct from prior administrations. He went to the World Economic Forum in January 2024 and began his speech saying that the Western world was “in danger because those who are supposed to defend Western values have been co-opted by a worldview that – inevitably – leads to socialism and, consequently, to poverty”.

The International Monetary Fund (IMF) estimates that in 2025 Argentina will be the fastest growing country in the Americas. Also, Argentina will be one of the few countries in the world to have a fiscal surplus, which will also keep reducing inflation, taxes and the risk of operating Argentine bonds.

Mr Milei’s only Achilles’ heel has been politics. His party has 37 representatives in the House of Representatives (out of 257 seats) and in the Senate his party has six out of 72 senators. This weakness, however, has not prevented Mr Milei from passing the laws that he wanted, such as the omnibus law and the fiscal law, and from allowing vetoes to laws that have been proposed by the opposition to obstruct his government.

Inflation is projected to continue to fall, and the economy is expected grow at a rate of 5 percent. Should these projections come to pass, it is likely that Mr Milei’s party will win the 2025 midterm elections. Should he gain additional support in Congress, he will be able to pass the laws he wants. Mr Milei wants to make Argentina “the freest country in the world”.

The world is watching the Argentine experiment. It is the first time that a major economy has followed the policies of the Austrian school of Economics. Argentina seems to be back on track after decades of political and economic mismanagement. There has been something of a cultural shift in Argentine society which has come to realise that ‘free’ things from the government were not really free after all, and when the government runs out of money, it starts printing new money, which causes inflationary problems.

Mr Milei’s government has reignited Argentina’s economic hope, setting the country on a path toward financial stability and growth through bold reforms, fiscal discipline, and a commitment to individual freedoms and free markets.

Javier Canosa is a partner at Canosa Abogados. He can be contacted on +54 11 7091 2121 or by email: jc@canosa.com.

BY

Javier Canosa

Canosa Abogados