Argentina, best known as a soccer powerhouse and birthplace of Pope Francis, has been forgotten as the economic powerhouse it once was a century ago. Today, the country ranked number 8 in the world by the size of its surface area, is also number 22 by the size of its product, but contributes only 0.6% to global GDP and ranks 63rd by GDP per capita.

On Sunday, Argentines went to the ninth presidential election since their return to democracy in 1983, which in turn became the most crucial in recent history. Javier Milei, who defines himself as a libertarian, won with 56% of the votes, more than eleven points ahead of his official opponent, Sergio Massa.

Milei, who will take office on December 10, receives the country in a "critical" economic situation, in his own words. Indeed, Argentina is facing galloping inflation, which exceeds 140% and is on track to end the year close to 200%, with poverty levels above 40% and 10% of its population in destitution. The official Argentine peso has suffered a 500% devaluation in the last four years, while the parallel dollar, or blue, is currently trading at $1,075, registering a 200% devaluation so far this year alone. Public debt is 85% of GDP, two-thirds of it is in foreign currency, and the country is currently the largest debtor to the IMF.

Milei's proposals are controversial and signify drastic changes in economic matters. Some of the proposals are a reduction in public spending, the closure of the Central Bank, the dollarization of the economy, the privatization of state-owned enterprises and the elimination of taxes. All these initiatives require parliamentary procedure and, although the legitimacy of his government is not an issue – since he won with a wide margin, won the election in 21 of the country's 24 provinces and became the most voted candidate in the history of Argentine democracy – it will be a challenge for him to govern without majorities. The La Libertad Avanza party, to which Milei belongs, after the last PASO, obtained 38 of the 257 seats in the Chamber of Deputies and 7 of the 72 in the Senate. Milei now has the support of Macri's PRO, but the Together for Change coalition, to which the PRO belongs, was fractured after this election. In addition, it is to be assumed that Peronism, a political current that has been in power in Argentina for most of the last 80 years, will exercise a strong opposition to Milei's ideas, although they could well suffer a strong shake-up after losing the Casa Rosada. All in all, Milei's ambitious reform agenda will be a challenge in front of Congress and, although no political force or bloc has majorities or quorum of its own, it is clear that it needs to generate consensus to reach the votes required (2/3) to pass laws.

While the uncertainty about the structural changes that are coming to Argentina is the fear of some, others see it as opportunities. Consider, for example, that some estimates indicate that the size of the capital market in Latin America is, on average, 50% of GDP. In Argentina, it represents only 9%, not to mention that of the United States (159%). Measured by this indicator, Chile is the first country in the region (73%), followed by Brazil (63%), Colombia (43%) and Mexico (36%), so, under the ideology of the incoming government, there is significant room for growth there. There would also be room for an improvement in bilateral trade between Chile and Argentina, considering that, according to national customs figures as of 2022, Chile brings 6% of its total imports from the neighboring country, but only sells 1% of its total exports. For Argentina, on the other hand, Chile is the fourth most important destination for its exports after Brazil, China and the United States. This could go on with the list of possibilities offered by Argentina with its 46 million inhabitants and its extensive areas for cultivation, livestock and exploitation of natural resources.

The market seems to be part of those who see the change of command in Argentina as an opportunity because, after the victory of the libertarian Milei, a strong recovery in the price of assets of that nation has been observed. Such is the case of the share of the oil company YPF, whose share price has risen by more than 60% in just three days, which seems to be related to the privatization proposals. Bonds have also gained value, such as the Argentine Republic's dollar bond maturing in 2030, whose price has risen by 6%, which would be related to fiscal adjustment plans and the commitment to honor debts. In terms of valuation, the exception for the moment is the Argentine peso, which measured against the blue dollar has lost 13% between Monday and Wednesday, which is attributed both to expectations about the elimination of the exchange rate clamp in the short term, and to the possible modifications to the exchange rate regime (dollarization) in the medium term, which has generated an increase in the demand for dollars. For its part, the official exchange rate has depreciated by only 0.7% in the week, basically because since Wednesday, November 15, the crowling peg system (controlled devaluations) came into force again.

Regarding the possibilities of dollarization, it should be noted that, based on the experience of other countries, including Ecuador and Panama within the region, Argentina presents the cocktail of factors that have led others to take such a measure. A favorable aspect in the face of a dollarization process is that Argentines have become accustomed to saving in dollars to protect themselves from inflation, as well as a fact that there is a high transactionality of this currency in the country. However, in the opinion of Alfredo Romano, author of the book "Dollarize, a path to economic stability", in order for Argentina to adopt the US dollar as its official currency, it is necessary, first of all, to make the pertinent fiscal adjustments that reduce public spending and recompose the level of the country's international reserves. International reserves have fallen to the lowest level since 2006 (US$21 billion) after four years of steady decumulation, but the most serious problem is that net reserves are, in fact, negative by about US$10 billion. Another aspect that requires special attention is the treatment of Leliqs (liquidity bills), which are mostly in the hands of national banks, players that would be key in a dollarization process.As for the legal procedure of an eventual dollarization process, what can be said is that, although it is not contemplated in the Constitution, there are rulings of the Supreme Court that indicate that "Congress is constitutionally empowered to create one or more species of currency for the country...", as well as the Monetary Law in Argentina indicates the possibility of having gold and other foreign currencies as legal tender. It seems then that there are options to dollarize, however, doing so without the proper consensus could mean the failure of the process.

Milene Rodriguez

Strategy & Investment Analyst