The world is used to watching economic crises unfold in Argentina time after time. In the past 50 years alone, the country has experienced three hyperinflations (1975, 1989 and 1990) and multiple major debt crises (like in 2001 and 2018). These have resulted not just in widespread poverty, but increasingly in emigration as well. As of early 2023, inflation runs at a 95% annual rate while the country fails to cut taxes, reduce public spending, or achieve a fiscal balance. With a populist government in charge, it would seem as if there is no hope left.
However, markets are once again betting on Argentina. Measured in US dollars, most Argentine stocks are up by 100% or more in the last six months. In the New York Stock Exchange, YPF, the country’s state-owned oil and gas company, was trading for around 11 dollars early this week, up from 2.91 in late July. During the same time period, Banco Galicia, one of the most important private banks of the country, went up from 5.75 to over 13 dollars, whereas the stock price of Argentina’s leading real estate development firm, IRSA, increased from 3.16 to 6 dollars. Stock price increases are all over the place. Why is this happening?
There is nothing inherent in Argentine companies that has changed from mid 2022 to early 2023, except for one thing: The government’s capacity to do damage to them has fallen. Ever since late 2019, when Peronist Alberto Fernández won the presidency alongside former President Cristina Kirchner (2007-2015) as his running mate, economic policies had been generally bad for business: The government created new taxes and increased existing ones, tightened import controls, reimposed bureaucratic procedures that had been scrapped by the previous administration, and so on. But after a bank run in July, the government pledged to stick to an agreement with the IMF to cut public spending, reduce the deficit and create a friendlier business environment. To secure that in a context of soaring inflation and deep unpopularity of the administration, powerful Sergio Massa replaced powerless Martín Guzmán as Minister of Economy, which signalized that pro-market policies would be somewhat consistent.
On the one hand, the ruling coalition seems to have understood that it cannot perpetually tax and spend and still win elections, even if measures to correct the course of the economy continue to cause pushback from inside the government. President Alberto Fernández faces reelection in October, but it is unclear whether he will run as his net approval rate is -54% while his Vice President’s is -44%. Peronists remain hopeful that Minister Massa can be a competitive candidate, but he is the face of fiscal adjustment: Were he to run, it would be the first time in decades that Peronism would show a relatively pro-business candidate.
On the other hand, the opposition has also become more market-friendly in recent years. After the 2015-2019 period, which saw little progress on taxes and regulation, former President Mauricio Macri is now vowing not to listen to ‘cynical’ progressives and is openly calling for the privatization or closure of state-owned companies, for example. Buenos Aires Mayor Horacio Rodríguez Larreta, the most serious opposition candidate at the moment, does not go as far but is not perceived as a left-winger who will deepen the country’s structural problems. Last but not least, the emergence of an economically libertarian alternative led by Javier Milei puts pressure to everyone else and could be key in the case of a run-off, which is at this stage likely according to polls.
Investors seem to be pricing in the fact that whoever becomes President in December 2023 will not have an incentive to run more deficits and further prevent business operations. At a 32-year high, inflation has become intolerable while debt markets remain closed and taxation is at record levels, which means that there is no room for anyone to promise more public spending as this will be impossible to achieve. And just as a negative policy change was anticipated by markets in 2018 and 2019, when stock prices plummeted as Macri failed and it became apparent that populist policies would return, investors are now also early protagonists of a likely positive change.
Of course, the future is impossible to predict. In light of increasing poverty levels, the more radical elements of the Peronist coalition may thrive and keep it anti-business. Moreover, Massa and Larreta, the most likely candidates from the government and the opposition, are notorious crony capitalists: Free markets are unlikely to be their goal, but rather a more friendly business environment for their friends. But in a country that has harbored such strong anti-market feelings for so long, even the expectation of a small change seems enough. Argentina needs a positive direction for its economy, and it looks like it will get it.