Milei’s shock therapy already leaves investors craving more

Just two days after taking office, Javier Milei’s government announced 10 new measures to pull Argentina’s economy out of its funk. It may prove too little for investors who have been sending the country’s assets rallying on the firebrand president’s promises.

The first steps of a promised “shock therapy” package announced by Economy Minister Luis Caputo late on Tuesday included devaluing the currency to 800 per dollar, from a current 366.50. That’s still short of the more than 1,000 parallel rate Argentines use to skirt currency controls. Milei also wants to halve the number of ministries, cut transfers to provinces and suspend public works, and plans to reduce subsidies on transport and energy sectors while boosting certain social welfare programme.

While investors agree the adjustment outlined is the best — and only — way forward for the troubled nation, they were left wanting some bolder moves, more details about the plan and how Milei plans to implement measures that require Congress support and are potentially disruptive to Argentines.

“The announcements are in the right direction but feel a bit underwhelming,” said Diego Ferro, the founder of M2M Capital in New York. “Are these measures good? Yes. Are they enough? Doesn’t seem so.”

Hours after Caputo’s televised comments, the Economy Ministry provided more details on their spending cuts, monetary policy and currency framework, saying Argentina is targeting a two-percent peso devaluation per month and that planned spending cuts are equivalent to 2.9 percentage points of GDP. The Central Bank is expected to make an announcement on monetary policy on Wednesday.

Here’s what else investors had to say about the initial measures outlined by Caputo, made when local markets were already closed and there was little trading in US-listed assets:

Jorge Piedrahita, founder of Gear Capital Management in New York
– Ten discreet measures but not an economic plan, leaves “a flavour of improvisation”
– The non-renewal of some labour contracts and the reduction of civil servant posts “are rather small”
– Caputo was not specific enough about reduction of transfer to provinces or subsidies to energy and transportation
– Social spending announcement was important to avoid unrest
– Diminishing red tape for imports “is a must” as well as the devaluation
– Inflation will be higher than projected in the next three months
– “It is a start but more work is needed soon; There are limitations given the need of some actions to be approved by Congress”
– Seems that markets anticipated the good news already and initial price risk for bonds “might be to the downside”

Alberto Bernal, Chief Strategist at XP Investments
– Measures “are logical and consistent with the needed urgency”
– “This is a draconian fiscal adjustment project that is going to be difficult to digest by Congress and by the population at large — there’s no alternative any longer”
– “Things will get more complicated before they get better, and Milei needs exporters to help him stabilise the external accounts”; “Money demand remains MIA because of the lack of confidence on the policy framework, the fiscal deficit is non-financeable with anything other than monetary issuance”
– “Let’s see if 800 is high enough to lure material amounts of USDs to come into the country”

Carolina Gialdi, head of international-markets sales and trading at Max Capital
– New official exchange rate of 800 per US dollar is “a comfortable number now, but it can quickly get eroded with high inflation”
– Announcement didn’t specify if level will be fixed, and if so for how long, or if it will float
– FX should float, the market should determine the price
– Announcement also lacked detail on size of fiscal savings

Diego Ferro, founder of M2M Capital in New York
– Investors probably expected “something a little more comprehensive” given the depth of the problem
– Measures were nothing new, so while positive, give feeling of “shallow level of analysis, of preparations to take over such a deep problem”
– Whether measures work “really depends on people’s reactions. So let’s cross our fingers and hope that in the next two, three months people accept this”
– Doesn’t expect much change in bond prices

Joaquín Bagues, Managing Director at Novus Asset Management in Buenos Aires
– Announcement “takes courage” but it’s “the right way to go if they want to achieve an economic recovery”
– More details are needed on how they are going to implement it

Oren Barack, managing director of fixed income at New York-based Alliance Global Partners
– Caputo was “direct and matter of fact”
– Expects markets will react favourably to “the first step of many to remedy and correct past imbalances”
– “While there may be some short term fluidity in bond markets, the immediate adjustments are clearly the best path forward”