Argentina’s newly elected President Javier Milei has vowed to ditch the nation’s currency in favor of the U.S. dollar because the peso “isn’t even worth excrement.”
The anarcho-capitalist and self-proclaimed “king of the jungle” won 56% of the vote with his radical plans to eradicate rampant inflation, which include a “moral obligation” to stop the nation’s central bank from printing money. He has said he plans to deliver "shock" therapy to the economy.
Worried about the economy? Here are the best shock-proof assets for your portfolio. (They’re all outside of the stock market.)
'A natural way to diversify': Janet Yellen now says Americans should expect a decline in the USD as the world's reserve currency — 3 ways you can prepare
However, resuscitating South America’s second-largest economy will be tricky. Inflation is currently roaring at 143%, the peso has lost 90% of its value in four years, the nation has almost no access to international capital and two out of five Argentines are living in poverty.
“Today we begin the reconstruction of Argentina,” Milei said after his win on Sunday. “If we do not move quickly with the structural changes that Argentina needs, we are heading towards the worst crisis in our history.” The economist, author and former TV pundit famously revved a chainsaw during his electoral campaign as a symbol of his commitment to cutting government spending.
Milei’s win sees the country move one step closer to dollarization — an idea the government has dabbled with and failed at in the past. In the short-term, it seems the new president’s promises to bring about dramatic changes ignited the interest of investors. His win sparked a major rally in the U.S.-listed shares of Argentine companies and an exchange-traded fund (ETF) focused on the country’s economy.
Argentina eyes the greenback
Milei’s goal to remove the nation’s battered peso in favor of the greenback will be easier said than done — and the stakes couldn’t be higher. Failure could result in the country suffering its 10th sovereign debt default, higher poverty levels and social unrest.
There are many challenges standing in the way of Milei’s grand dollarization plans.
First, the country is pretty much broke. The central bank has almost no U.S. dollar reserves, and it lacks access to global capital markets to get the stocks that would be required to keep the economy going.
Technically, Milei could go to the International Monetary Fund (IMF) to ask for another loan, but that’s a long shot considering how Argentina is already struggling to comply with the conditions of an $44 billion aid deal reached with the IMF in 2022.
According to Reuters, IMF Managing director Kristalina Georgieva said the organisation is "very keen" to support Argentina and it could be a candidate to receive a relatively small amount of extra financing.
To alleviate some of these challenges, the new president has vowed to cut down on spending and open the country’s economy to global markets. He also plans to privatize certain state-run companies, including media outlets and the oil giant YPF Sociedad Anonima (YPF). Shares in the company closed 40% higher in New York following Milei’s win.
Milei also faces sizable political and legal battles, and there’s no guarantee that dollarization will indeed fix the nation’s fiscal challenges. Other South American nations that have gone down this route, like Panama, El Salvador and Ecuador, have seen varying degrees of success, with the latter two still struggling to deal with mega levels of debt.
Giving Washington control over Argentina’s monetary policy may help to bring the nation’s rampant inflation under control, but there are many other meaningful fiscal reforms Milei will have to spearhead if he really wants Argentina to return to being a “world power” within his stated goal of 35 years.
While the future of the Argentinian economy remains shrouded in doubt, one thing that is abundantly clear is that Milei’s win caught the attention of investors in the U.S. Argentine stocks rallied after the election, but many are taking a breather or falling this week.
The Global X MSCI Argentina ETF (ARGT) — a U.S.-listed fund focused on Argentine equities — has climbed over 28% in the last month. It's now up nearly 50% year to date. Todd Sohn, an ETF analyst at Strategas, told Reuters last Monday was the second-most active day of trading ever recorded for the fund since its launch in 2011. ARGT's largest holding is e-commerce giant MercadoLibre (MELI) which accounts for 28% of it.
When it came to U.S.-listed shares of Argentine companies, wins were seen across various sectors. For instance, American depositary shares (ADRs) of major financial institutions like Banco Macro SA (BMA), Grupo Financiero Galicia S.A. (GGAL), Grupo Supervielle (SUPV) and Banco Bbva Argentina (BBAR) have all surged since the start of last week.
Shares in Argentina’s largest independent energy company, Pampa Energía S.A. (PAM), have also jumped since the election, along with those in leading agricultural company Cresud SACIF (CRESY) and Telecom Argentina (TEO).
If these stock market gains have caught your interest, remember that there are many moving parts to consider when it comes to Milei’s economic policy and the future performance of Argentinian companies. He is inheriting an economy that's teetering on the brink of its sixth recession in a decade.
If the prospect of a dollarized Argentina has you intrigued in Argentine stocks, first consider this cautious note by Goldman Sachs’ economist Sergio Arnella published in The Wall Street Journal: “As with everything in economics, there is no free lunch, and adopting, preserving and benefiting from dollarization could be challenging.”
What to read next
Rich young Americans have lost confidence in the stock market — and are betting on these 3 assets instead. Get in now for strong long-term tailwinds
