Analysis-Argentina markets want fiscal ‘kick’ to economy as Milei shock plan readied

By Walter Bianchi and Jorgelina do Rosario

BUENOS AIRES (Reuters) -Argentine voters may have cause to worry about new President Javier Milei’s pledge for painful economic shock therapy, but markets are keen, hoping the libertarian will give the economy a “firm kick” when he lays out his plan this week.

The outsider economist on Sunday reaffirmed plans for tough spending cuts to address the country’s worst economic crisis in two decades and bring down inflation nearing 150%, though he warned the situation would get worse before getting better.

“There is no money,” he said repeatedly in his maiden speech, pledging to make tough decisions even if that means pain for the country. “The challenge we have ahead is titanic.”

Analysts said that Milei, who won over voters with a “chainsaw” economic plan to cut state spending and overturn a deep deficit, needed to follow through on this tough talk. His election win has buoyed stocks and bonds in recent weeks.

“Milei’s calculated echo of ‘blood, toil, tears, and sweat’ isn’t just rhetoric, but a deliberate move to temper expectations and instill urgency ahead of what will be a challenging fiscal path,” said Mariano Machado, principal Americas analyst at Verisk (NASDAQ:) Maplecroft.

“Beyond fiery speeches, effective governance is the linchpin to stabilization, and the playbook of the new administration remains a puzzle,” Machado added.

Milei’s economy chief Luis Caputo is expected to announce a package of economic measures with investors looking out for a devaluation of the peso, now held by currency controls, public spending cuts and potential privatizations.

In his maiden speech, Milei said a fiscal adjustment of 5% of gross domestic product will impact the state but not the private sector, without providing any details.

“Milei’s focus is on eliminating the fiscal deficit, the Achilles heel of the Argentine economy,” said Kezia McKeague, regional director at McLarty Associates in Washington, who advises multinational companies on Argentina.

CUTTING BACK

Cuts could come from the removal of tariff subsidies, reducing capital expenditures and the reduction of fiscal transfers to provinces, said Fernando Marull, founder of Buenos Aires-based economic consultancy FMyA.

Marull said the 5% cut was “achievable,” but the governability risk is the main hurdle, as four out of 10 Argentines are poor. “I think he has a six-month window. If he succeeds, Argentina will return to the international arena.”

Others agreed that time was of the essence for Argentina.

“It will be crucial for the new administration to quickly revive confidence,” said economist Gustavo Ber, adding that the government needed social and legislative support given the likely economic pain ahead and inflation spiking further.

“The macroeconomic picture… is, to say the least, terrifying. Although inflation has already hit its highest in the last 30 years, everything indicates that the worst is yet to come,” said consulting firm GMA Capital Research.

Milei will need to rebuild depleted central bank reserves analysts estimate to be a net $10 billion in the red, ease a looming recession, bring down 40% poverty and revamp a failing $44 billion program with the International Monetary Fund.

His first weeks may set the tone.

“To get out of this situation it will be necessary for the new government to act quickly and eliminate capital controls as soon as possible,” said Lautaro Moschet, economist at the Freedom and Progress Foundation.

Morgan Stanley said in a report said that without a strong economic program, Argentina may need to sharply weaken its exchange rate, currently around 365 per dollar, which could see the price of greenbacks double.

“An FX adjustment seems inevitable,” the investment bank said in the Dec. 7 note, adding that it could weaken to 700 per dollar. “An economy with no credible economic program may need to compensate with a weaker FX to attract investment.”

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