The tight approval of the Bases law in the Senate practically coincided with the first six months of the government of Javier Milei. The result was finally what the ruling party expected, after several months of marches and countermarches. It meant at the same time the end of a first stage and the start of what could be considered the second phase of the emergency plan. And presumably the last, if the objectives are achieved.
As you pointed out Alejandro Catterberg, director of Poliarquía, “more important than what was achieved is what was avoided. If the Bases law had been rejected, the economic and political dynamics would have taken a negative turn: fall in asset prices, rise in the dollar, external distrust, increase in internal conflict and radicalization of the Government.”
Although this is a counterfactual, because the law was approved, there is little doubt that this description fits very well with the scenario that would have occurred in the event of a legislative defeat.
Even after the good reaction of Argentine assets, the feeling at the end of the week was relief, not euphoria. The AL30 bonds in dollars remained at levels of USD 55, still somewhat far from the USD 60 they reached a month ago. Something similar happened with country risk: it pierced 1,400 points, but it is still far from 1,200 a few weeks ago.
July 9 will be a relevant date. There is already talk that that day the governors could be convened again in Tucumán, once the Bases law has been sanctioned, which still needs to be analyzed in Deputies. But in addition to the political information, that day the interest on the dollarized bonds and the first capital amortization of the AL30 will be paid.
The Central Bank issued a rule that went almost unnoticed but that streamlines operations in foreign currency. It established that the dollars that a client receives in a stock exchange company (ALYC) should no longer return to a bank account but can remain there. The exchange rate does not change much, but the web of regulations that put all kinds of obstacles to dollar operations are being unraveled.
The objective is clear: to bet on the reinvestment of those currencies that investors will receive, for more than USD 1.5 billion in a few weeks. The first tranche of Bopreal 2 (which pays capital in twelve consecutive monthly installments) also expires at the end of July.
If this happens, at least partially, the demand for bonds could rise significantly, encouraging a new jump in prices. The objective for the Government is for the country risk to fall below 1,000 points at the end of the year, which would bring closer the possibility of recovering financing in the capital markets.
From now on, a new stage opens, still within the emergency plan that started last December 10. The first phase can be identified with these characteristics: rapid fiscal balance, liquefaction of monetary aggregates, significant reduction in inflation after the initial flash and the sanction of the Bases law as the closing of this stage.
The bonds recovered after the approval of the Bases law, but they were still halfway there. The country risk ended the week below 1,400 points, but was far from the 1,200 of a month ago. The debt payment of July 9, for more than USD 1.5 billion, could help to achieve an additional jump
Having achieved these achievements, in the coming months no minor challenges will appear that start now and should be met by summer 2025.
The new agreement with the IMF appears as a central step within this new phase. Already in June, the Central Bank promised to disclose the monetary policy strategy that it will carry out, including goals for aggregates and the future of interest rates.
But the most relevant thing about the new agreement will not be the goals, but rather the disbursements that the organization is willing to make. The Minister of Economy, Luis “Toto” Caputoacknowledged that to a large extent the opening of the stocks will depend on that decision of the IMF, which already needs to strengthen reserves before allowing exchange rate unification and subsequent currency competition (something they explicitly support in Washington).
Milei reiterated in the last week that the exit from the stocks is closer, because there are few paid liabilities left and it would remain to resolve the “puts” of the bonds issued in the last stage of the previous Government. These are clauses that would allow these titles to be sold at any time, generating a strong injection of pesos.
But beyond keeping monetary issuance under strict control, it seems difficult to lift exchange restrictions without a considerable level of reserves in the Central Bank. The decision of the Milei-Caputo tandem is to minimize the risks in the case of a future exchange opening. For this, it is necessary to continue reducing monetary aggregates and at the same time accumulate more reserves.
The path towards a new agreement with the IMF seems paved, based on the fiscal surplus that exceeds the organization’s forecasts and the accumulation of reserves. But it seems much more complicated to obtain a disbursement, especially of the magnitude that the Minister of Economy intends.
It does not seem easy to achieve this, especially with the United States elections approaching. For the IMF to approve the disbursement, it must first receive approval from the American Treasury. Will Joe Biden’s administration be willing to give such support to the Argentine Government? Or will we first have to wait for the results of the elections and the arrival of a new government, which will not be until the end of January 2025, perhaps donald trump?
Economic reactivation is also a fundamental leg of the coming months. Keeping inflation low is key to consolidating the recovery of income: salaries, pensions and social plans, a process that has already begun but is still happening in slow motion.
The economy has already clearly hit a floor and recovery has begun, but it is still very tenuous. The improvement could be in slow motion in the coming months and be consolidated at the start of 2025, based on the new agreement with the Fund and the gradual exit of the exchange rate.
For now, the “achievement” is to have found a floor to the sharp drop in the first quarter, but the improvement is taking place in dribs and drabs. There is a long way to go in all sectors to return even to the starting point of November, the last month of the previous administration.
The agreement with the IMF, the consolidation of reserves and finally the exit from the stocks are essential to consolidate this improvement. The World Bank estimated that GDP will fall 3.5% this year, but was much more optimistic for 2025, estimating a 5% jump.
Meanwhile, Milei retains his main political capital in the midst of an economy that is still having a hard time getting started: his high level of acceptance, which is still above 55%, the same percentage as that achieved in the runoff.
