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Pantheon Say Highly Fragmented Congress Will Be Big Hurdle For Milei

ARGENTINA
  • Mr. Milei inherits an economy under strain, with the need to tighten monetary and fiscal policies, against a complicated external environment. It won’t be easy, even if he tries to move the economy onto a more orthodox and sustainable path. The necessary macro adjustment means that conditions in the real economy likely will get worse before they get better.
  • Pantheon believe that tighter monetary and fiscal policy would push the economy back into recession in the very near term. In addition, a rapid move to dollarize could fan the flames of hyperinflation in the near term as domestic currency is shunned, even if it could put the country onto a more sustainable longer-term growth path, eventually.
  • Mr. Milei’s win, in the short-term, will be negative for domestic financial markets, as his real economic plans are still unknown. But Pantheon believe that conditions will gradually improve, reflecting markets’ hopes that the end of business-unfriendly policies and populist economic practices, including the elimination of unsustainable public service subsidies, will help. This could, in theory, reduce public spending by more than 10% of GDP, and unwind trade barriers, and currency controls.
  • But Mr. Milei won’t have it easy, which will put a lid on market’s performance, as he lacks a decent support in Congress. Mr. Milei’s LLA alliance will be the third-largest force in both the Chamber of Deputies and the Senate, behind the leftist Peronist UxP and conservative JxC. While Mr. Milei may find some backing among JxC, the leftist groups likely will seek to limit his policy-making abilities. As such, uncertainty and high economic and financial market risk will continue to dominate, despite Mr. Milei willingness and desire to bring the economy out of its mire.
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