Milei wants to make Argentina great again

That seems to be the promise from radical right-wing libertarian president-elect Milei, who won a decisive victory in elections over the weekend. Donald Trump wrote: 

“The whole world was watching! I am very proud of you. You will turn your country around and truly Make Argentina Great Again.” Headline and editorial writers proclaim that Milei’s election will catapult Argentina into an “unpredictable and potentially turbulent future”. 

But I ask you – will it be more unpredictable and turbulent than it has been already? 

Pro US Sentiment 

Milei’s international outlook can be cast simply as pro-US and anti-China – he doesn’t do deal with communists. “My allies are the United States and Israel,” he’s said. Now Milei has sounded a bit more emollient of late in a bid to win round centrists, but his election is a stunning rebuke of the Peronists. Economic reform is the key – inflation is running at 140% and the peso is a joke. “I know how to exterminate the cancer of inflation,” he said last Sunday.  

Milei has promised to “end the fraud of the peso, which is melting like ice cubes in the Sahara”, by a process of dollarisation, and shut down the central bank. Dollarisation is not a magic wand, but it could help lower inflation and stabilise the economy.  

The experiences of Panama, Ecuador and El Salvador suggest that “full dollarization can help countries achieve lower inflation, economic stability and growth”, says a Fed report from a while back. “Full dollarization enhances policy credibility and encourages foreign investment. It promotes fiscal discipline, a competitive financial system and economic integration with international markets. However, countries implementing full dollarization must establish structural programs and institutional reforms to ensure that short-term stability develops into long-term economic growth.” The Cato Institute are fans. 

Repeating Past Failures? 

A kind of soft dollarisation has been attempted before in Argentina and ended in total failure, and recurring devaluations of the peso since. The idea that things are different this time pervades. The idea this time is not just to peg the peso as they did with the currency board but to abandon it entirely – tying the economy to the US, the Fed and external shocks in prices - but supposedly ending devaluations, fiscal indiscipline and monetary financing of debt. A sizeable loan would be required (perhaps $20bn) – the central bank is in the red and it would need dollars to replace the peso. That could be tricky given Argentina’s less-than-stellar credit rating and penchant for welching on debt. And, should Milei get his way on the dollar it would be one way. Upon arriving in Mexico, the conquistador Hernan Cortes was said to have burned his ships to encourage his men to march on – apparently this is no longer thought to be true. But dollarisation would be akin to burning the ships – there would be no going back. 

Dollarisation may be positive, but it will not be an easy path to take and there is a lot to do in Argentina that will take more than simple rhetoric. But the sense that Argentina is not a one-way left-wing street will be positive for Argentine stocks and bonds – the voters have shown after 20 years that they are prepared to try something different in the hope of getting a different result, albeit the future remains uncertain and unpredictable. The people or Argentina are about to become an economic experiment. Let’s hope Milei is successful in achieving his aim to return Argentina “to the place in the world which it should never have lost”. 

In the Markets 

European stock markets opened flat as they paused after a strong week of gains. The DAX had risen almost 4% last week but eased back a touch in early trading around the 15,900 mark. The FTSE 100 had a less impressive week and is down a third of a percent this morning as it struggles to mount much above 7,500. Japan's Nikkei passed its June intra-day peak to hit a 33 year high. US futures are flat after a decent ramp last week. The US dollar is weaker again having slid on Friday amid weaker Treasury yields, with DXY futures looking to test the 200-day moving average for the first time properly in a year. Gold steadied around $1,976 having failed to sustain a move past $1,990 on Friday. 

Elsewhere 

Otherwise, it’s a pretty quiet start to the Thanksgiving week. Overnight the People's Bank of China left the Loam Prime Rate unchanged, keeping the one-year and five-year at 3.45% and 4.20%. Data this morning showed German producer prices down 11% - but policymakers are sticking to their guns. "It would be unwise to start cutting interest rates too soon," Bundesbank President Joachim Nagel said on Friday. 

"We must not loosen policy until we are absolutely certain of returning to price stability on a lasting basis." 

Crude gained again having risen by around 4% as it looks like OPEC+ will consider making additional oil supply cuts to boost prices when it meets on Nov. 26th.