Argentina: Short-term political risk upgraded from category 7/7 to 6/7 amid better liquidity

President Milei managed to turn the page 

In his first year in office, neoliberal President Milei enacted impressive reforms, including the biggest fiscal consolidation in 30 years, which led to a primary surplus in 2024 – the first since 2008. The government, a serial defaulter, paid USD 4.3 billion to sovereign bondholders in January, its largest repayment since a 2020 debt restructuring. Furthermore, the central bank reduced its quasi-fiscal liabilities and closed several indirect sources of money creation. In December 2024, for the first time in a decade, an IMF programme was successfully concluded with a new one likely to be announced in the coming weeks.

Argentina’s short-term political risk was upgraded amid improved liquidity and the prospect of a new IMF loan. 

On the economic front, the current account deficit (-3.5% of GDP in 2023) turned into a small surplus of an estimated 0.4% of GDP in 2024 and gross foreign exchange reserves increased by a third (see graph below). Hence, Argentina’s liquidity improved but remains precarious with limited useable foreign exchange reserves due to the currency peg. Net foreign reserves remain deeply negative and are the main stumbling block to lifting currency controls. Looking forward, the liquidity situation is expected to stay difficult given high external debt service, an expected small current account deficit in 2025 of around -0.2% of GDP, lack of access to financial markets, high short-term external debt and currency controls. On the upside, a new IMF programme with sizeable fresh funds (besides the funds necessary to repay the debt service to the IMF) would significantly ease liquidity. These additional fresh funds are a possibility thanks to the good relationship between Milei and Trump. Given the improved liquidity and prospect of a new IMF loan, Argentina’s short-term political and assimilated events (PAE) risk was upgraded from category 7/7 to category 6/7.
 

Argentina is not out of the woods

Large downside risks remain though. Domestically, the delicate and worsening social situation (over half of Argentines live in poverty, a 12% increase in a year) and Milei’s falling popularity, could derail fiscal consolidation – especially given the mid-term election in October. These issues could even push him out of office and thus pave the way for another unorthodox Peronist government. Furthermore, a crucial new IMF loan could be delayed or turn out smaller than expected given Milei’s reluctance to lift currency controls (a key IMF request). On top of that, a new IMF agreement must be approved by Congress, which may be difficult given Milei’s lack of congressional majority and the upcoming elections. Furthermore, the risk of multiple bankruptcies in the agriculture sector (see below) in combination with dry weather conditions from the La Niña pattern could significantly reduce current account revenues (which are historically the most important source of current account revenues, averaging around 45% and pressurise liquidity. Lastly, the official exchange rate remains under significant pressure (see graph below), putting the country at risk of (another) currency crisis or a significant devaluation. 
 

Externally, the ongoing slowdown in the main export markets (Brazil and China), lower commodity export prices (e.g. soy and wheat), climate change induced disasters and a more volatile global environment (with potential US tariffs) are the largest downside risks.

Bankruptcies are expected to rise, especially in the agriculture sector

The business environment (category G/G) remains highly challenging. Inflation, though falling from a sky-high 211%, remains staggering (118% in December 2024). It is expected to continue to fall but will face upward pressure from the crawling peg: the official exchange rate depreciates monthly by 2% vis-à-vis the US dollar, though this pace will decrease to 1% as of February. On the upside, the two-year long recession (-3.8% in 2024) is bottoming out and economic growth between 3% to 5% is on the cards for 2025. Nevertheless, a rise in bankruptcies is expected, especially in the agriculture sector as illustrated by the default on loans of leading agricultural conglomerate ‘Los Grobo’ mid-January (amongst others related to falling prices and previously high export taxes). The public sector also faces risks: the high public debt (92% of GDP end 2024), potential fiscal policies changes, a potential enforcement of the suspended lawsuit against state-owned energy company YPF for USD 16 billion and the challenging debt service repayment schedule keep the risk of another sovereign default high.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com