The newfound stability under Milei’s leadership has rekindled investor interest in Argentina. However, the government must still tackle pressing challenges, including an overvalued peso, capital controls and a sluggish job market.
A gold mine in Argentina’s San Juan province. Economic activity has picked up under Milei, but significant challenges persist.
Marcos Brindicci / Reuters
A German entrepreneur was the star guest at last week’s Panorama Minero mining congress in Argentina. Michael Meding was named Entrepreneur of the Year by the industry at a gala dinner in Buenos Aires, but the 50-year-old quickly broke the formal mood. Taking the microphone, he cracked jokes about his competitors and invited his entire team to join him on stage.
Meding is well on his way to becoming one of the most influential figures in Argentina’s booming mining industry. In September, he became the first foreigner to head the Gemera mining association. His rising prominence is tied to his Düsseldorf-based company’s role in developing the Los Azules copper project in the Andes, a key venture for the Canadian firm McEwen Mining.
PD
According to the industry platform Mining Intelligence, the Los Azules project is targeting one of the world’s 10 largest untapped copper deposits, with over $300 million already invested. Car manufacturer Stellantis has invested in order to secure the copper supply for its electric vehicles in the future. Meding now has to raise $2.5 billion to develop the mine.
Argentina reclaims foreign investor confidence
The manager is confident that he will succeed. Under President Milei, Argentina is working to shed its reputation as an unreliable and chaotic investment location. «A year ago, investors were still saying: Great project, too bad it’s in Argentina,» says Meding, who has been living in the Andean city of San Juan for three years, where he used to work for a gold mining company. «Now they say: Great project, interesting that it’s in Argentina.»
The shift in sentiment has been remarkable. The rates charged by international banks, investors and funds for lending to Argentina reflect this. When Milei took office a year ago, the country’s risk premium, measured by JPMorgan’s EMBI index, which summarizes bond markets in emerging countries, stood at nearly 2,000 basis points. Today it is 670 points. This is still a lot, but significantly less than Argentine borrowers have had to pay in interest premiums over the past decade.
The renewed confidence in South America’s long-troubled economy stems from President Milei, whose often radical measures have instilled a sense of optimism. Chief among his successes is his battle against inflation. One month after taking office, Milei cut government spending so sharply that the state budget – excluding interest payments – has been in surplus ever since.
Milei doesn’t print money – peso appreciates in value
This marks a dramatic departure for a country where printing money to fund deficits has fueled spiraling inflation for decades. When Milei took office in December of 2023, Argentina’s annual inflation stood at 211%. JPMorgan now projects inflation will drop to 120% by the end of 2024, and to «just» 25% in 2025, a level that would be a small miracle of stability for Argentina.
As inflation falls, the economy is also returning to normal with banks lending for real estate again, and credit volume higher than it has been for fifteen years. Introducing a tax amnesty, the government has motivated Argentines to bring around 20 billion dollars into the country.
In Argentina, mistrust in the financial system runs so deep that an estimated one-third of the country’s gross domestic product is held in dollars – either stashed abroad or tucked away under mattresses. Former central banker Nicolás Gadano estimates that Argentines are holding $200 billion in cash. He notes that, outside the United States, no other country in the world has as many U.S. dollar bills in circulation as Argentina.
At the same time, dollar revenues are increasing – not only because the strong agricultural sector is set to deliver a record harvest after years of drought. Oil and gas projects, as well as mining ventures in the Andes, where the Canadian mining company McEwen is also building its mine, have begun exporting. JP Morgan forecasts Argentina to double its energy exports next year.
Investments in energy and mining have risen sharply, driven by a special government program called Rigi, which grants large investors – those committing over $200 million – exemptions from taxes and standard capital controls for 10 years. These terms are locked in for 30 years – even if a future government should attempt to rollback these regulations.
Analysts are optimistic, but warn of the challenges
Meding says he was skeptical when he saw the candidate Milei for the first time. However, he’s now convinced that the president: «has clear goals and knows how to implement them politically,» he says. He also has a very good team around him.
Analysts at investment bank J.P. Morgan are also optimistic. They believe that if Milei can sustain budget surpluses, push through reforms and expand private sector investment, per capita income in Argentina could increase by 50% in 10 years. That would be good news for a country where half the population lives in poverty.
However, J.P. Morgan also warns that Milei still faces major challenges. His government must solve three obvious problems in the short term: the overvalued peso, capital controls, and the stagnating supply of jobs.
The most expensive country in South America
Within a year under Milei’s leadership, Buenos Aires has become the most expensive city in Latin America. According to The Economist’s cost-of-living index, a Big Mac is more expensive only in Switzerland. The burger costs the equivalent of $7.50, while a full-time bicycle courier delivering food for an app earns a maximum of $1,000 per month.
Shoes, clothing and fashion items are priced similarly to those in Paris or London. In Buenos Aires shopping malls, stores are empty in the lead-up to Christmas, the most important shopping season of the year. In Santiago, on the other hand, the capital of neighboring Chile, Argentine women are storming shopping malls with wheeled suitcases. In Brazil, Chile and Uruguay, beach resorts are preparing for the onslaught of Argentina’s middle class during the summer vacations that are about to begin. Hardly anyone can afford a vacation in their own country.
The reason Argentina has gone from being one of the cheapest countries in South America to the most expensive in just 12 months is that the government has gradually allowed the peso to appreciate. By halting the printing of new pesos, the central bank has restricted the currency’s supply, making it scarcer and stronger.
This strategy helps curb inflation by reducing the cost of imports. However, the peso’s exchange rate to the dollar is exactly where it was a year ago when Milei took office. One dollar buys around 1,000 pesos, as it did in December 2023 – the gap between the official and black market rates all but erased. In the same period, however, the Argentine currency has experienced inflation of around 190%.
«Argentina will become significantly more expensive in the months ahead,» fears Kurt Zweifel, a farmer with Swiss roots. For many farmers renting land and covering the costs of labor, seeds and crop protection, profits are increasingly squeezed. Modern agriculture is the country’s most important export sector. Argentina has become an expensive location for all sectors with low productivity. For the mining sector, Meding notes that wages are already among the highest, but personnel costs now account for 40% of his operational budget.
However, a devaluation is not to be expected. The government shows no sign of wanting to weaken the peso. It remains committed to keeping inflation under control.
Foreign exchange controls likely to remain
The outlook for an end to Argentina’s strict foreign exchange controls remains bleak. Milei has not yet touched the strict exchange rate regime of his predecessors. There are still too few dollars in foreign currency coffers to risk liberalization. A run on the dollar would immediately drive up inflation rates. Exporters are therefore still forced to exchange their dollars for pesos. Argentines are allowed to buy no more than $200 a month at the exchange rate set by the state. Importers also have only limited access to foreign currency.
This is a problem for investors, who not only want to send capital to Argentina, but also expect to eventually repatriate dividends or profits at some point. The International Monetary Fund (IMF), with which Argentina is in debt to the tune of over $40 billion, is also refusing to send the government fresh money for debt restructuring.
For Michael Meding, the exchange rate regime make financing his copper mine a logistical headache, even though he can transfer dollars abroad via a special regime for major investors. He hopes that Argentina will have lifted capital controls by the time the mine goes into production around 2030.
High personnel costs
Another challenge is Argentina’s high personnel costs, which complicate job creation.
Argentina’s flagship industries – agriculture, mining, and oil and gas production – are capital-intensive, but employ comparatively few people. However, in labor-intensive sectors such as tourism or retail, high wage costs are eroding profit margins.
The government is pursuing a series of microeconomic reforms to boost productivity, but these efforts will take time to translate into lower costs.
Milei dreams of transforming Argentina into a global hub for artificial intelligence development. He hopes his many admirers in Silicon Valley – above all Elon Musk – will soon invest in the country. He has already met three times with Donald Trump’s future efficiency commissioner. Milei’s ambition is to establish a lithium battery factory for Tesla vehicles, though Musk has yet to commit to the idea.
Latest articles
Global reporting. Swiss-quality journalism.
In today’s increasingly polarized media market, the Switzerland-based NZZ offers a critical and fact-based outside view. We are not in the breaking-news business. We offer thoughtful, well-researched stories and analyses that go behind the headlines to explain relevant events in the U.S., in Europe and worldwide. To produce this work, the NZZ maintains an industry-leading network of expert reporters around the globe who work closely with our main newsroom in Zurich.
Sign up for our free newsletter or follow us on Twitter, Facebook or WhatsApp.
Source link : http://www.bing.com/news/apiclick.aspx?ref=FexRss&aid=&tid=6760b5db988d472c81b7e9d86a96325d&url=https%3A%2F%2Fwww.nzz.ch%2Fenglish%2Fjavier-milei-still-faces-major-challenges-in-spite-of-renewed-confidence-ld.1862410&c=12381658463968950059&mkt=en-us
Author :
Publish date : 2024-12-15 22:52:00
Copyright for syndicated content belongs to the linked Source.