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Don’t Cry for Milei, Argentina

How to Avoid Endemic Business Risks in a Country so Perón to Crisis 

Argentina is predictably unpredictable. Once amongst the world’s wealthiest countries during its Belle Époque over a century ago, Argentina has since fallen into a protected economic tailspin. With its current inflation rate nearing 300% per year, Argentina is approaching a breaking point. Will Argentina’s radical new president, Javier Milei, and his “Shock Therapy” agenda be able to jolt the country back on track? Or will he join the ranks of prior leaders promising far more than they deliver? Although streamlining Argentina’s bloated bureaucracy, privatization measures, and fiscal austerity sound appealing to prospective foreign investors, any company would be well-served to conduct routine due diligence operations to insulate themselves from the country’s unique business risks, regardless of how Milei’s political agenda materializes.

Given that the country is in such a politically and economically tense situation, why do business in Argentina at all?

Argentina is one of the largest economies in the Western Hemisphere, with a population of almost 50 million people and a GDP of 631 billion. Furthermore, as one of the most developed countries in Latin America, Argentina also has a dynamic domestic consumer base. Interestingly, consumer trends and preferences in Argentina tend to more closely parallel that of Europe, rather than other Latin American countries, but the United States remains one of its largest trading partners, nonetheless. That being said, although it is generally considered a difficult market for foreigners to enter due to protectionist economic policies and bureaucratic red tape, these structural conditions have correspondingly made the country a relatively untapped and lucrative international market as well.

Generous government subsidies have made higher education extremely accessible compared to other countries in the region, so Argentina has a notably skilled workforce as a result. Similarly, while the country’s human capital is an asset, so too is Argentina’s vast natural resource wealth. Holding one of the world’s largest reserves of shale oil, Argentina is also home to highly coveted minerals for the clean energy transitions like lithium and rare earth elements (REEs). Famously, its robust agricultural sector has made it a major global exporter of soybeans, wine, meat products, and wheat as well.

Finally, Argentina is a member of MERCOSUR (a major regional trade block), the G20, and the Financial Action Task Force (FATF), an international agreement to fight money laundering and promote government transparency. As a result, its network of international commitments has well-positioned the country within global supply chains.

Origins of Current Crisis: What is the Context and Where Did This Come From?

Argentina’s “free market” is not truly as “free” as it appears. Although the country’s dominant political philosophy, Perónism, has undeniably raised the average citizen’s standard of living, on the macroeconomic level, it also contributed to “government-backed favoritism of dominant interest groups and encouraged pervasive rent-seeking instead of productive economic activity. On the balance, such institutional framework condemned Argentina to decades of stagnant productivity and poor economic growth.” Essentially, many of the same conditions underpinning the country’s developmental trajectory over the last century have also hindered it as well.

Initially, for several reasons, Argentina failed to institutionalize this developmental momentum during the early 1900s, with increasingly corroded democratic establishments paving the way for populist leaders to rely on their charisma, rather than an electoral mandate, to govern. Perhaps no other leader in the history of the country exemplifies this more than Juan Domingo Perón and his enduring political movement. Defying the traditional right-left political spectrum, Perónism is both fiercely nationalist yet also socially progressive, centering the state as the ultimate powerbroker between labor and capital.

Perónism emerged during a time of economic hardship and political instability in the wake of the Great Depression. With diminished international demand for its once-lucrative commodity exports, Argentina turned inwards to develop its domestic market, prioritizing economic self-sufficiency over free trade. Perón’s administration founded and expanded several state-owned companies and implemented a series of protectionist economic policies to shield its nascent manufacturing sector from foreign competition. Expansive social programs and sweeping subsidies formed the cornerstone of his mass popularity, serving as the basis of contemporary Argentina’s generous entitlement benefits system.

Milei’s agenda: Perónism and “Shock Therapy”

Although the country has experienced periods of economic reprieve since the golden age of Perónism, the legacy of Peron’s administration’s statist market distortions has left Argentina structurally and institutionally obligated to spend more that it can consistently generate. Since the end of the Commodity Boom, Argentina has essentially been on “financial life-support” for more than a decade; in fact, it holds the record for the IMF’s largest loan in the history of the organization to keep Argentina fiscally afloat. Several factors have permitted Argentina’s current protracted crisis to balloon to its current scale, and the results of previous attempts at reform from all sides of the political spectrum have been insufficient in addressing its root causes. As a result, disillusionment with Argentina’s political establishment has correspondingly ballooned in reaction to its consistent shortcomings.

It should be no surprise then that a firebrand, chainsaw-wielding political outsider like Javier Milei promising to “cut down” the size of the state won 56 percent of the vote in Argentina’s 2023 presidential elections. The self-described anarcho-capitalist’s “Shock Therapy” economic agenda has deeply polarized public opinion, and his push for sweeping privatization policies has especially antagonized Perónists. Notably, upon assuming the presidency, “he announced a devaluation of the peso by over 50%, and promised to slash electricity and transport subsidies, halve the number of government ministries from 18 to nine, suspend public works and reduce federal transfers to Argentina’s 23 provinces. “The government reckons these cuts amount to almost 3% of GDP.”, as reported by The Economist in December 2023. In addition to his radical economic agenda, Milei has also gone on record supporting controversial policies such as legalizing the human organ trade (calling it “just another market”) and banning the use of gender inclusive language in government, including all official documents.

However, nearly a year into his first term, Milei has been forced to scale back his agenda. A fervent Perónist-led opposition coalition has rallied around their shared outrage towards Milei’s policies, blocking several of his flagship economic initiatives. Furthermore, his “56 percent” victory margin is deceptive; he was elected via a two-round run-off voting system, “so that as much as a quarter of the electorate chose him as a lesser evil to a failed system rather than as any road into the future.” This is especially notable because Argentina has a federal political system, somewhat similar to that of the United States, but none of the country’s provincial governors belong to Milei’s political party, which adds another layer of difficulty to building consensus and implementing his agenda on a national level.

Furthermore, Argentina has a particularly powerful executive branch; within this “hyper-presidential” system, the country’s leader can bypass its congress in many instances. Given Argentina’s history of authoritarian rule, and his admiration for other controversial figures like El Salvador’s Nayib Bukele, democracy activists worry that Milei may be tempted to reject political compromise all together and increasingly seek to govern unilaterally. Milei’s supporters, however, argue that Argentina urgently needs reform to prevent it from falling off an economic precipice. Although opinions diverge greatly, his critics and supporters alike agree that Milei is anything but forgettable.

As a result, what are the business risks endemic to Argentina and how are these policies attempting to address them?

Given Argentina’s history of statist economic management, the lines between the country’s public and private sector are somewhat blurred. For example, in addition to several major state-owned companies directly controlled by the public sector, Argentina’s government owned stakes in nearly 70 percent of the country’s publicly traded companies before the Milei administration in 2022. Although a core principle of Milei’s attempt to “slash” the size of the government includes widespread privatization of state-owned companies, Argentina’s “hyper-presidential” system has permitted past leaders to undo policies of their predecessors.

Perhaps no other firm exemplifies this more than Argentina’s Yacimientos Petrolíferos Fiscales (YPF). Founded in the 1920s as the first state-owned oil company outside of the Soviet Union, YPF expanded substantially in terms of both size and importance two decades later under Perón. In this era, YPF became a critical source of state revenue just as much as it was a political tool, forming the cornerstone of his energy subsidies strategy for low-income citizens while also a being a tangible symbol of Argentina’s energy independence movement.

Eventually, its political utility eclipsed its profitability, and institutional mismanagement caused YPF to become an unsustainable drag on the state budget. Deeply indebted and struggling with acute hyperinflation, under the administration of Carlos Menem, Argentina privatized YPF and sold it to Spanish oil company Repsol in 1999. However, later, in 2012, amidst the backdrop of strong oil prices and a cash-strapped government, President Christina Fernandez de Kirchner accused Repsol of failing to meet its investment promises and “re-nationalized” YPF, much to the dismay of international investors.

Although “re-privatizing” YPF was a core tenant of Milei’s original “Shock Therapy” agenda, he has since backtracked on this goal due to staunch Perónist opposition. Fighting against unfavorable political headwinds, this changing stance towards YPF’s “re-privatization” may be a policy barometer indicating the trajectory of the rest of Milei’s agenda, and international investors should be paying attention. While similar reformers have come and gone, few have left Argentina better off than they found it; Milei has a formidable historical precedent to overcome if he wants to overhaul the country’s economic institutions while simultaneously respecting its democratic ones.

Nationalization, or “re-nationalization” in the case of Argentina, is a risk in any market economy. However, the “threat level” of nationalization depends heavily on the country’s political context. Regardless of Milei being able to achieve his policy goals during his term, if he fails to systemically intuitionalism them, the country’s subsequent administration may be able to override any of his “Shock Therapy” measures, returning the country to its status quo.

Conclusion

In short, Argentina’s attractiveness lies in its potential as a largely untapped consumer market. While the prospect of being “early” to a new market is appealing, the question of “how early” depends on a company’s risk appetite. If Argentina’s history has demonstrated anything, it is that the country is prone to cyclical swings between pro-market and protectionists policy agendas without meaningful structural reform. Although the country’s new president has vowed to break this cycle, his detractors are concerned about the implications of Milei’s administration on integrity of Argentina’s democracy. As a result, any foreign firm seeking to do business in Argentina should conduct appropriate due diligence and political risk evaluations to insulate themselves from the country’s endemic volatility.  Integrity Risk’s Full Spectrum Diligence has been designed to provide the business they risk evaluations they need to make informed investment decisions.

Christopher Lindrud, Analyst, Integrity Risk International, is a Washington, D.C.-based political risk and due diligence professional specializing in the Portuguese and Spanish speaking worlds. In addition to his graduate degree in Latin American Studies from Georgetown University, he has extensive experience living and working in both Brazil and Chile. Christopher is particularly interested in themes related to human development, extractive industries, and political economy in South America’s Southern Cone region.