According to the economist Simon Kuznetz, there are four types of
economies, developed economies, underdeveloped economies, Japan
and Argentina. And to be clear, he didn't
separate the last two out because of their quality.
A century and a quarter ago, the situation in Argentina was very
different to today. Back then, Argentina was the 6th
richest nation on earth, with GDP per capita almost as high as
the leading economies Britain and the United States, and
higher than Spain, its former colonial master.
The nation's former glory is evident in the architecture from
that period in Buenos Aires. Unfortunately, the 20th century
didn't treat Argentina as well. It's possibly the only country
that's ever transitioned from being developed to a developing
market economy. A big part of the decline can be
explained by political instability, which began in 1930
when a military junta took power, ending 7 decades of
civilian constitutional government.
The nation endured 7 military coups between 1930 and 1981.
Juan Domingo Peron, a former military officer who was elected
president three times, cast a long shadow over Argentina.
His left wing movement, known as Peronism, drew support from
labor unions, the poor and the working classes.
Peronists won 10 out of the 14 presidential elections in which
they were allowed to run. Peronists favoured economic
isolationism and stifled international trade, which had
made Argentina wealthy in the past in an attempt to protect
workers from foreign competition.
This focus meant that over time, Argentina's exports fell as a
percentage of global exports year over year.
There are, of course, many versions of Peronism.
There's Peronism, Neo Peronism, Orthodox Peronism, Revolutionary
Peronism, Renovation Peronism, Federal Peronism, and
Kirchnerism, which it seems is a branch of Peronism opposed by
some factions of Peronists. Government spending has been a
massive problem in Argentina over the years, where successive
governments put in place expensive social programs that
the country couldn't afford and more than 1/3 of all workers in
the country were employed by the government.
Argentina additionally has one of the most regulated economies
in the world, with the weight of regulation growing year over
year. There were of course strict
labour laws, complex import and export regulations, stringent
controls on currency exchange and rent controls, but also
rules on where you could fly a kite, how artists should dress,
requirements that horses wear hats on sunny days and and a ban
on feather beds which lawmakers argued encourage lascivious
behaviour. Decades of energy and transport
subsidies, which were put in place to protect the poor,
bankrupted the country and caused all sorts of economic
distortions. Left-leaning politicians
introduced these subsidies to protect the poor from inflation,
but the subsidies were so costly that the government had to print
money to pay for them, fueling inflation in a vicious cycle.
Argentina has seen decades of economic mismanagement that
brought high inflation when its central bank printed money to
fund excessive government spending.
Major collapses in the Argentine peso occurred in
1952195819671975198519892000 and 1 and 2018 through to present.
In 2001, Argentina defaulted on $100 billion of sovereign debt,
which was the largest sovereign debt default in history at the
time. The country has defaulted 8
times since then, most recently in 2020.
Last year, GDP per capita was 11% lower than it had been in
2011, and inflation was over 211%.
And then Havier Malay was elected, an unusual politician
who campaigned with a chainsaw, saying that he would chainsaw
government spending and regulation.
He smashed up Styrofoam models of the central bank.
He said that he would close multiple government departments.
He has a superhero alter ego called General and Cap, and he
said that he would dollarize the economy.
So now that he's been one year on the job, let's look at how
he's done. Malay, a self-described anarcho
capitalist, won the Argentine presidential election last year
with a lot of showmanship but also a serious economic program
that's been described as the most radical dose of free market
thinking since the days of Margaret Thatcher.
While the media have frequently described Malay as being
Argentina's Donald Trump, other than that they both have a
background in television, distinctive hairstyles and a
hatred for anything woke, the two men have very little in
common. They do, however, speak well of
each other, and Malay says that he sees Trump as part of the
broader fight against socialism. Malay was the first foreign
leader to meet Trump after his presidential victory in
November, and Trump called him a great gentleman and a MAGA
person. God.
He's a great gentleman. You know, He's mega.
He's mega. Make Argentina great again, it's
true. Now, while Trump worked his way
up from serving fries at McDonald's just a month ago to
the highest office in the United States with promises of economic
protectionism like tariffs, Malay argues instead for free
trade and has been slashing subsidies and tariffs in one of
the most protectionist countries in the world in order to control
the triple digit inflation that he inherited.
Argentine media has reported that Malay will be seeking a
free trade agreement with the United States once Trump takes
office. But both men are outsiders to
traditional politics. Malay has almost no support in
Congress and had to negotiate every initiative with opposition
parties. Trump, on the other hand, will
have full control of both houses of Congress a year into his
tenure. Malay has managed to slash
government spending, which is now 30% lower in real terms than
it was when he took office a year ago.
He's cut the number of ministries from 18 to 8, halted
almost all public works, and ended most transfers to
provincial governments. In his first month in office, he
managed to run a primary surplus, meaning that he brought
in more money in taxes than the government spent, and he has
managed to do this every month since then.
Running a surplus like this eliminates the need for the
central bank to finance government spending by making
transfers to the government, which in Argentina are always
announced as being temporary but are rarely paid back and so
money is printed. This primary surplus is a huge
improvement and comes after more than a decade of uninterrupted
deficits. This is quite remarkable in
Argentina. Malays signature achievement is
that inflation has fallen sharply over the last year.
Argentina's monthly inflation rate declined from 26% last
December to 2.7% as of the last reading in October.
Now, 2.7% is by no means low. That's a monthly figure, not an
annual figure. So it translates to over 37%, a
Turkish level of inflation. So Argentina's by no means out
of the woods, but at least the direction of travel is correct.
This reduction in inflation is the main reason that Malay has
held on to his popularity, which at 56 percent is higher than his
last two predecessors approval rankings after their first years
in office. Cutting inflation was his key
promise to voters, and so far he's delivered on it.
His popularity has in fact been rising in recent months, which
is very unusual for a president who's cutting spending as
severely as he is. Voters in every country hate
austerity, but Argentinian voters who have grown accustomed
to outsize government handouts would be expected to hate it
more than average. At present, they seem to be
willing to tolerate the pain with the belief that things will
be better in the future. Days after taking office, Milae
devalued the Argentine peso by more than 50%, causing the
already sky high inflation rate to rise even higher.
He announced cuts to energy and transportation subsidies,
cancelled public works projects and began cutting government
jobs to reduce spending, Saying if we continue as we are, we're
heading towards hyperinflation. There is some real pain
associated with this shock therapy.
It doesn't get called shock therapy for no reason.
Argentinas economy is expected to have contracted 2.6% in the
third quarter of 2024 compared to a year earlier, with this
being the 6th quarterly decline in a row.
While the figures have not yet been released, it looks like the
economy expanded against the prior quarter, meaning that the
recession may be over. It's no surprise that GDP has
fallen in Argentina, as when you slash government spending by 30%
and government spending made-up almost 40% of GDPGDP has to
fall. The Argentine economy is
expected to finish the year 3% smaller than it was when Malay
took office last year, and should it hit JP Morgan's growth
forecast of 5.2% for next year, that would only bring GDP per
capita back to where it was in 2021.
For many Argentinian workers, malaise cuts have been extremely
painful. He's laid off more than 30,000
government workers and slashed spending on health, welfare and
education. Spending on public salaries and
universities is 20% lower this year in real terms than it was
before he took office. He eliminated price controls and
subsidies that made public transit, heating bills and
groceries cheaper, leaving more people struggling to make ends
meet. Argentinas poverty rate reached
almost 53% in the first half of the year, up from 42% at the end
of last year. This is more than double the 26%
it was back in 2017. The biggest savings in terms of
government spending have come from holding down the real or
inflation adjusted value of pensions.
About 35% of the spending cuts came from a decline in
pensioners purchasing power, another 25% came from reducing
investment in infrastructure programs, and the remaining 40%
came from a mix of measures like cutting subsidies, cutting
transfers to provinces and downsizing of public staffing
levels. According to the Financial
Times, 1 of Malay's biggest political advantages is the lack
of reasonable alternatives. In Argentina, people appear to
be OK with putting up with the economic pain as long as they're
seeing results, which they have been seeing so far.
The people who voted for him are saying let the madman get on
with it. Argentina is home to more than
3000 labor unions and roughly 40% of the countries workforce
is unionized. The unions have held
surprisingly few strikes since Malay took power, and some
leaders say that they've struggled to draw the mass
participation it hoped for. the FT interviewed the head of
Argentina's construction Workers Union, who admitted that society
holds the unions partially responsible for the economic
crisis, along with the politicians.
He said for now they feel they need to trust in something new
to solve Argentina's structural problems.
Argentina's central bank foreign reserves were minus $11 billion
when Malay took office last year, and they've improved to
minus $7 billion today, which is obviously better but still
negative. About $20 billion has re entered
the formal banking system due to a tax amnesty that encouraged
the public to deposit their savings and repatriate some of
their foreign savings too. Many predicted that Malay would
struggle to make the changes he had campaigned on due to his
lack of support in Congress, opposition from powerful trade
unions and his lack of government experience.
But he has managed to outperform expectations, mostly by the use
of executive powers to get around opposition in Congress.
Argentina's country Risk Index, a measure of the premium
investors demand to hold local bonds compared to the equivalent
U.S. debt, fell below 900 basis points in October from the 2500
basis points. It had been odd last year.
While this is a huge improvement, it's still more
than twice the risk of an emerging market bond index, so
there's plenty of room for a further improvement.
On the campaign trail, Malay promised that the economy would
grow fiercely once he eliminated capital controls and the red
tape that restricts everything in Argentina.
His Ministry of Deregulation began work in July and quickly
started announcing regulatory reforms daily.
It's too early to decide if these changes are working today,
but it's likely that they will improve the situation given the
bureaucratic weight that they're lifting.
In Argentina, which is is one of the most regulated countries in
the world, Malay brought in a rule to reduce government delays
where a requested permission is considered approved if the
government does not respond to the request within a determined
period of time. I believe Modi brought in a
similar rule in India a number of years ago and it worked there
too. Some early successes in
Argentina include eliminating the country's rent control
system, which tripled the supply of available rental apartments
in Buenos Aires and caused rents to fall by 50%.
Malay eliminated an import licensing scheme too, which
caused a 35% drop in the price of home appliances and a 20%
drop in the price of imported clothing.
The country implemented an open skies policy that increased
airline competition. Previously, there had been a
rule to protect the national airline that banned competitors
from parking their airplanes overnight at one of the main
airports in Buenos Aires. Malays new Ministry of
Deregulation, which is made-up of lawyers and economists, say
the cutting red tape is improving economic freedom and
reducing opportunities for corruption in the country.
Despite Malay's libertarian stance on issues like
privatization and deregulation, there are concerns that he has a
less libertarian approach to issues like policing and freedom
of speech. He announced a plan a few months
ago to use face recognition software to deal with protesters
and AI to predict, detect and investigate crimes, which the
press has compared to the film Minority Report.
Malay spent $300 million buying 24 fighter jets in April, saying
that they're needed to guarantee Argentinas control of its
airspace. This doesn't make an awful lot
of sense during a period of austerity when all other
spending is being slashed. Investors have been impressed
with the changes in Argentina and this can be seen in credit
spreads and the fact that the national stock index has soared
almost 140% this year. Malay has been working to
attract business investment which is badly needed to boost
economic growth. Domestic businesses are happy
with Malays reforms but foreign investors are still in a wait
and see mode as there have been many false dawns in Argentina
over the last 100 years years. Capital controls, which limit
the flow of foreign exchange into and out of the country, are
still in place and do deter international investors, as no
one wants to invest in a country where you can't get your money
back when you want it. Malay's government still sets
the exchange rate too, and there is a lot less talk about
dollarizing the economy today than there was last year.
Malay devalued the peso by more than 50% last December and then
by another 2% each month since, but the currency is still
overvalued, according to most economists.
Devaluing the peso rapidly again would cause a spike in
inflation, but a weaker peso would also make the country's
exports more attractive to foreign buyers.
Malay argues that he can't risk floating the peso until there's
a large supply of hard currency in the central bank to calm
markets and prevent Iran, which would trigger inflation.
While the fiscal picture has improved massively, Argentina
still faces significant external financial pressure, with more
than $14 billion of debt repayments due next year alone,
with essentially no chance of the country borrowing more on
international markets until the economy is a lot stronger.
Argentina still has too much foreign exchange debt relative
to its limited export base and foreign exchange reserves.
And while the fiscal balance of the government has improved
hugely, the central bank balance sheet still has negative net
reserves. Malay has done an amazing job on
the fiscal front. It's very unusual for a country
to voluntarily do a bigger fiscal consolidation than the
IMF asked for. The challenge now is that things
will only get more difficult going forward, as the terms of
the most recent debt restructuring in 2020 gave
Argentina five years of breathing space.
But that is about to run out next year and they'll have to
start paying about $3 billion a year on their international
bonds. The core problem for Argentina
is that the foreign exchange balance sheet does not look
good. There are no non borrowed
foreign exchange reserves sitting at the central bank, and
the country has huge foreign currency obligations and a small
export base to earn the necessary foreign exchange.
While Malay wants to solve the problems without restructuring,
Argentina's debt structure does need to reflect the nation's
economic. And strength Malay's free market
reforms have gone as well as they could have gone, especially
given the scale of the problem that he's dealing with.
And the people of Argentina seem to have regained a lot of lost
faith in their government. There is still a very tough road
ahead for the country and a huge challenge for Malay will be to
ensure that voters stick with him as he implements the needed
reforms. Thanks for tuning into this
week's podcast, with a special thanks to my supporters on
Patreon who make it all happen. Have a great week and talk to
you again soon. Bye.