Why the stock market loves the Argentinian president

In a couple of weeks, it will be a year since Javier Milei took over as president of Argentina. In this time he has attracted attention for his libertarian economic policies. A devoted follower of the free-market Austrian school of economics, Milei has slashed government spending, scrapped regulations and cut taxes. All to decrease government debt, bring down inflation and encourage entrepreneurship.

So far there has been some success. Every month since he was elected, the government has run a fiscal surplus; unprecedented for recent Argentinian governments. Milei achieved this turnaround by eliminating nine of the 18 government ministries, including the Ministry of Culture and the Ministry of Women, Gender and Diversity. Across the government, he has laid off over 24,000 employees. On top of this, he has cut fuel subsidies and removed rent controls. 

More recently his Ministry of Deregulation announced it would repeal more than 40 regulations. These included price controls in the beef industry, regulations for bicycle tyres and subsidies for grocers that sell potatoes of “normal and usual characteristics”. Any government intervention that is not essential, such as policing, the military and legal courts, is going.

This has contributed to a 30 per cent decline in real government spending in the first eight months of the year, according to the bank BBVA. The knock-on effect, as the graph shows, is that month-on-month inflation is down from more than 20 per cent at the start of the year to a more manageable 2.7 per cent in October.

However, cutting government spending doesn't come without a short-term cost. In the first eight months of the year, gross domestic product (GDP) contracted 3.4 per cent. Meanwhile, the poverty rate has risen more than 10 percentage points from last year to 52.9 per cent, according to the INDEC national statistics bureau.

Lots of politicians run on platforms of low taxes and lower government spending, but few pursue it as ideologically as Milei. In 2022, former UK prime minister Liz Truss achieved the first part with sweeping tax cuts. However, she paired this with the Energy Price Guarantee, which subsidised household consumption of natural gas during an acute shortage, costing the government around £20bn. The well-known result was the collapse of the UK gilts market and Truss’s historically short time in office.

President-elect Donald Trump is an admirer of Milei and invited the Argentine to give a speech at a Republican gala at Mar-a-Lago earlier this month. This mutual appreciation makes sense in lots of ways. Both want to cut government employees, lower taxes and have been critical of identity politics. And it doesn’t take much squinting to see how Milei’s Ministry of Deregulation inspired Trump’s newly created Department of Government Efficiency.  

However, there is a big, often overlooked difference between the two. Unlike Trump, Milei is not a nativist or a protectionist. In his manifesto, Milei barely mentions immigrants other than a promise to deport foreign nationals who have committed crimes in Argentina. In fact, he is actively encouraging foreign investment. He repealed restrictions preventing land ownership by foreigners and cut import tax from 17.5 per cent to 7.5 per cent.

All of Milei’s policies are driven by a belief that prosperity comes from increased economic freedom. This means removing as many barriers as possible and then letting market competition drive the economy.

In the short term, Milei’s cuts are shrinking GDP, but he hopes that the rise of entrepreneurship will eventually accelerate growth. “If you are successful in the free market capitalism, you are a hero, you are a social benefactor, you are a prosperity machine,” he said in a speech at the World Economic Forum earlier this year.

So far, the market trusts Milei’s story and is looking beyond this year’s drop in output. In the private market, Argentine fintech company Ualá was recently valued at $2.75bn after raising money from German insurer Allianz, making it one of Latin America’s most valuable start-ups. While in the public market, the global MSCI Argentina ETF, which tracks securities with exposure to Argentina, is up 77 per cent in the past year.

Milei’s association with right-wing parties has attracted scrutiny from supporters of more traditional institutions. But unlike some, Milei hasn’t had to subvert political tradition to get his way. A recent blog post by George Mason University economist Dan Klein points to the fact that Milei has gone through all the proper political channels to enact his reforms, and rather than being an authoritarian, is one of the few liberal politicians “pushing back the enemies of liberty”.

Predicting how long the extreme markets-based regime remains politically acceptable is difficult to forecast. But Argentina might be one of the few countries that would comply. Its electorate understands the damage of socialism better than any, with the economy being crushed by the nationalist and high taxation policies of Peronism for the best part of 70 years. The people were ready for change, and investors will be hoping they see it through to the end.