UBS Financial Services noted that Argentina has achieved a significant economic turnaround, eliminating a fiscal deficit that exceeded 4% of GDP within a single year. This turnaround has led to a marked decrease in country risk, contributing to a substantial increase in the value of Argentina's US dollar sovereign bonds and local stocks.
In 2024, the bonds roughly doubled in price, while local stocks surged by 120% in US dollar terms. Argentina's economic landscape is set to be shaped by three key developments over the next 12 months, according to UBS.
First, a rebound in growth and a continued moderation of inflation following the recession in 2024. Second, the prospect of a new agreement with the International Monetary Fund (IMF) that would provide access to additional funds. Third, the midterm elections in October, where President Javier Milei’s party is expected to strengthen its position in Congress.
The country is currently in negotiations with the IMF, and there is optimism about a new aid program that would replace the existing USD 44 billion arrangement from March 2022. The Milei administration is hopeful of securing an additional USD 10-15 billion in funds, which would be pivotal for Argentina to alleviate capital controls and maintain a stable peso.
The IMF has acknowledged Argentina's fiscal and structural reforms, and the narrowing of the exchange rate gap could improve the country's standing with the Fund. President Milei's rapport with Donald Trump may also play a role in the negotiations, given the United States is the largest IMF shareholder.
However, investors are also contemplating the longevity of Milei’s political influence and whether Argentina can sustain its economic recovery and break free from a history of economic decline. The need for labor, tax, and social security reforms presents substantial structural challenges. Additionally, reliance on the exchange rate as a nominal anchor raises concerns about its viability as a long-term strategy.
UBS maintains a positive outlook on Argentina's economic signposts for 2025, suggesting that the country's USD sovereign bonds have the potential to perform well, with spreads expected to narrow modestly in the first half of 2025.
Nonetheless, global financial conditions, particularly the policy direction of the incoming Trump administration and a hawkish Federal Reserve, pose risks to Argentina's economic recovery. Moreover, the domestic political climate remains a critical factor to watch, as any shift in popular support for Milei’s administration could lead to significant repricing of Argentine assets.
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