Argentina edges closer to bond market return
From chainsaw to turnaround: President Milei's shock therapy beginning to produce results
The images of Argentine president Javier Milei on the campaign trail brandishing a chainsaw might have caused some scepticism among weary bond investors, but 18 months since taking office, his lumberjack approach to government is showing fast results, with Argentina now on the cusp of regaining access to international capital markets.
“It was kind of scary to see him out there with the chainsaw, but it was really the shock therapy that they needed,” said Kate Moreton, an emerging market sovereign analyst at Columbia Threadneedle Asset Management.
That shock therapy meant plunging the economy into recession and imposing falling living standards on Argentines — something that has traditionally brought the population pouring onto the streets. But that recession was short-lived, and by the third quarter of last year the economy was starting to turn around and poverty rates were falling.
Furthermore, Milei adjusted the government’s budget balance by around 6% of GDP in a year, “which is a remarkable achievement”, said Graham Stock, senior sovereign strategist, emerging markets at RBC BlueBay Asset Management.
“Because the fiscal is under control, the scope for being reasonably imaginative around the FX regime is greater because they’re running a budget surplus,” said Stock. “That means they’re no longer printing pesos to finance a budget deficit, so the inflationary pressure in the economy is vastly reduced.”
This taming of inflation has been critical, because while investors are more focused on the fiscal adjustment and the path to debt sustainability, for the local Argentine population, slowing price rises has been the most important achievement of the Milei administration.
This has meant Milei has remained popular despite the hardships created by his economic policies. His popularity rating has hovered around 47% this year, only marginally below where it was in January 2024, a month after taking office, according to an Atlas Intel survey.
“Even at a time of pretty drastic fiscal adjustment, Milei’s popularity has held up remarkably well, and it’s because inflation has come down from a peak of 290% after the devaluation when he took office to as low as 2% a month earlier this year,” said Stock. “The fear that this draconian medicine was going to be socially unacceptable proved wide of the mark.”
One of the reasons for the fast turnaround is because Milei’s reform programme is built around fiscal responsibility, something which has been missing or failed to stick during previous reform efforts.
“Since Peron came to power in 1946, Argentina has never had a prolonged period of fiscal discipline,” said Gustavo Medeiros, global head of research at Ashmore. “That’s what Milei identified as the root case, and it’s this fiscal anchor that makes me think that the next leg of the adjustment is also going to be successful.”
Investors say part of the reason Milei has been able to pull this off while others have fallen short is because of his populist persona, which is steeped in anti-establishment rhetoric and straight-talking that stands in sharp contrast to fellow reformers such as Mauricio Macri.
“Macri tried a restrictive fiscal policy to rein in inflation and he failed, he became extremely unpopular,” said Thierry Larose, a portfolio manager in the EM debt team at Vontobel. “Milei is good but also smart at conveying his messages and making people happy despite the difficulties they are facing. You need a character like Milei to do that, people think that he is like ‘one of us’, they recognise themselves in him.”
The rapid pace of the economic turnaround has been all the more notable given that Milei has been operating without a majority in congress, forcing him to rely on deals with centrists and in some cases governing through decree.
“I’ve been surprised by the ability of the administration to maintain the fiscal restraint with very scarce political power in congress and in the different provinces given that governors also play a very relevant role in the political system in Argentina,” said Diego Pereira, chief economist for Southern Cone and the Andeans at JP Morgan. “No one now contests the feasibility of maintaining a fiscal surplus in Argentina; years ago, this was impossible to entertain.”
Deregulation efforts have also helped Milei’s agenda, enabling the economy to recover quickly despite the scale of the fiscal adjustment.
“The economy was very over-regulated, so that has helped cushion the blow,” said Lucas Martin, sovereign debt strategist at Bank of America Securities. “So, he has surprised investors a lot in terms of how much he’s been able to accomplish in a relatively short period of time and the extent to which he’s able to maintain political support.”
Loan arranger
All of that helped pave the way for a bumper US$20bn IMF loan agreed in April, with a hefty chunk of that being handed over upfront. At the same time, the World Bank and the Inter-American Development Bank also agreed new financing deals for Argentina, totalling another US$22bn.
“The fact they’re also getting other multilateral money in addition to the IMF money really gives them a good runway to continue with their adjustment programme,” said Aaron Gifford, sovereign credit analyst team leader at T. Rowe Price.
While market-watchers had been anticipating a deal with the IMF to be a formality, there was still uncertainty over the timing and the strings the fund would attach.
“At the end of last year and the beginning of this year, there was some debate and uncertainty as to whether the government would do a deal before the midterm elections or after,” said Martin. “But it’s fair to say that the programme really surprised to the upside versus investor expectations, with US$12bn upfront in the first disbursement, that’s quite extraordinary and that’s a recognition of the work that Argentina has already done in terms of the fiscal adjustment.”
The terms of the deal included Argentina easing its capital controls, allowing individuals to freely purchase dollars, though it kept some restrictions in place for businesses.
“For private sector investment and potential growth, it was obvious that maintaining the capital controls was preventing the required increase in investment into the economy,” said Pereira.
Argentina also agreed to allow the peso to float, albeit within a set range between 1,000 and 1,400 pesos to the dollar, avoiding a sharp devaluation and the risk of inflation surging back. The peso is likely to be supported in the short term as well by proceeds from the soybean and wheat harvests, with exporters exchanging their dollars for pesos.
“The FX float is coming at a time when the bias is for appreciation rather than depreciation, and that’s exactly what we’ve seen so far,” said Stock. “On the first day of trading, the official exchange rate weakened by about 10%, but the parallel exchange rate actually strengthened, so you had a convergence of the two rates at around 1,200 pesos to the dollar. And since then, the official rate has unwound a little of that depreciation that we saw initially with the lifting of capital controls, and that’s helping to shore up confidence in the story.”
The timing of the IMF deal and the willingness to ease capital controls and let the currency float underscores that Milei is putting economic principles above politics given the midterm elections are only a few months away.
“That’s why we’re seeing another large leap forward in normalising the FX regime, despite the potential implications that could have on inflation, on his popularity ratings, and on his election prospects,” said Gifford. “It’s just another step for Argentina to become a normal country again, and a lot of good developments will come on the back of that.”
While Argentina’s economic progress has been recognised by the IMF, there is still some uncertainty about what Milei’s strategy is to build up their international reserves sustainably in the long term.
“In order to do that, you need foreign direct investments and a natural inflow of dollars,” said Larose. “For now, it’s not an issue because they are awash with dollars from the IMF. But at some point, they will have to find a plan to pay it back.”
Bond investors, for now, are bullish on Argentina’s prospects. In early May, the country’s 2035 bonds were trading at just above 11%, down from about 16% a year ago. While yields have been generally edging lower, they did spike higher in early April in the wake of Donald Trump’s tariff announcement.
“The big concern was that the Argentine government was dragging its feet too much on easing capital controls and keeping the currency artificially propped up, and with a worse external environment that was going to lean on FX reserves even more, there was a chance of some kind of accident happening going into the October elections,” said Gifford.
Now the IMF deal has been struck, those near-term concerns about reserve pressure have evaporated.
“If they continue along this line and Milei does really well in the midterms, then this could be a multi-year positive re-rating story,” said Gifford.
The focus now is on Argentina regaining access to international bond markets. Milei himself said in April that the country intends to return, though that will hinge on yields falling below 10% — the point at which it's generally considered viable to issue.
“Argentina is still one of the most attractive upside potentials within the emerging market space,” said Medeiros. “Obviously, it is no longer the case that you can buy bonds in the 30s as when Milei was elected. Now, they trade in the 60s and 70s. You no longer have that massive asymmetry, but you also have lower execution risks, particularly after such a big deal with the IMF and other creditors.”
A question of when
With Argentina now flirting with yields at close to 10%, the question is when it will actually pull the trigger on what would be its first new international bond sale since 2018.
“They’re not quite there yet, the yields are coming down, so it is reasonable to think that by the beginning of next year — which is when they have the next big amortisation payment — they could well have market access again,” said Stock. “They may even have it before then, but the nervousness around the midterm elections in October might make people a little more cautious.”
External volatility fuelled by US trade tensions may also take the decision on timing out of their hands, given issuance windows are likely to be limited.
“If it was only a micro story and only contingent on what Argentina does, then 100% they would regain access this year,” said Medeiros. “The problem is that you have exogenous factors and geopolitical risks that are omnipresent today.”
Whenever it does finally return, there is still some uncertainty about how much it would borrow. While it is unlikely to need much if any net new financing given its budget surplus, it does need to pay down maturing debt, said Stock. Right now, Argentina has about US$65bn of global bonds outstanding.
That is making some investors nervous that there could be a deluge of new issuance, which could cause yields to back up.
“For us as bond investors, we know that if yields converge towards 10% there will be a wall of supply coming,” said Larose. “So to buy those bonds at 10.5% or low 10%, you need to be very brave because there would be a potential wall of supply waiting to hit.”
However, even though it is getting closer to hitting that magic 10% barrier, the next leg down might prove more difficult to navigate.
“The end of the journey is probably harder than the beginning,” said Larose. “It’s easier to go from 20% to 12% than from 12% to 10%, especially because from 20% to 12% there was zero risk of having this wall of supply looming.”
The midterms in October are also likely to dictate investor appetite for a new bond issue. Despite Milei’s consistent popularity rating, it is not a foregone conclusion that he will increase his party’s representation in congress. For example, Milei became embroiled in a crypto scandal in February after he promoted a cryptocoin that surged in value before quickly collapsing, resulting in calls for his impeachment. Anything that increases the risk that he will only serve one term will likely prompt a shift in investor optimism.
“The market’s hope at this point is that he emerges from the midterms with at least a stronger position if not an overall majority in congress, because that would prevent him from becoming a lame duck president and even open up the possibility of him winning re-election in 2027 so you have a much longer horizon for these market-friendly policies,” said Stock.
Given Milei’s economic stewardship so far has corroborated his election campaign claims that if you impose fiscal discipline and adopt liberal policies you can get higher growth with lower inflation, that might give him additional political currency with voters.
“The plan is working, so that’s why the main risk for Milei is an exogenous shock or an unforeseeable political event that will actually take support away from him,” said Medeiros. “But it has to be something strong, because these small skirmishes that keep on popping up are far too weak compared with the solidity of the macroeconomic rebalance that he’s managed to engineer in Argentina for the first time in 25 years.”
This means Argentines may well be willing to give more time for Milei’s medicine to work given that past political flip-flopping has resulted in the economic strains the country faces today.
“What Milei has been able to accomplish has been remarkable, because typically what you observe in Latin America when you have market-friendly governments, the population quickly becomes fatigued,” said Martin. “So, there is a chance that the population decides that this is a model that they’d like to see play out over more than just one administration.”
Twenty-third time lucky?
That would augur well for Argentina’s long-term prospects. While the IMF deal struck in April was the country’s 23rd such agreement, this time is already different, said Pereira.
“The 22 prior programmes were basically negotiating money in order to one way or another finance the government’s fiscal gap,” said Pereira.
“This time, it is not about what used to be the perennial promise of adjusting the fiscal and steadying the conditions going forward — they’ve done that already.”
This is the biggest indicator yet that this IMF deal will have a different ending than previous programmes.
“They’re definitely doing their best to convince us that it is different this time, it’s the best position that they’ve ever been in to write a new story,” said Moreton.
On top of that, the US administration is also mulling the idea of giving Argentina a credit line through the US treasury, said Gifford.
“That would be a game-changer, not in terms of size, because the amount would be relatively limited compared to the numbers we’re seeing from the IMF and other multilaterals, but it’s unheard of for the US government to open up a bilateral credit line with a serial defaulter like Argentina,” said Gifford. “If that happens, it’s huge.”
The market performance since Trump’s tariff announcements has also given investors hope that Argentina has turned a corner.
“It’s a good story — we’ve had a meaningful rally through some of the worst trade uncertainty, which really shows that despite being a previous distress story, it’s been able to get through a lot of challenging times,” said Gifford.
“Now the IMF has laid out the red carpet for them. I don’t want to say this time is different or that they’ve done the impossible, but that’s the way things are heading.”