Investing in Argentina's potential economic boom
Investing in Argentina's potential economic boom
Stock summary: a long track record and attractive dividend yield
The following is for educational and informational purposes only, and is not a recommendation to buy or sell shares. When buying or selling shares, investors should do their own research and seek independent financial advice if necessary.
For ease of reading, due to length (and because some email providers clip long emails), subscribers may prefer to read the following at this link or via the Substack app.
"I didn't come to lead sheep. I came to wake up lions. And the lions are awakening."
"My North is freedom."
"Viva la libertad, carajo!" ("Long live freedom, dammit!")
Javier Milei, President of Argentina
"The problem with socialism is that you eventually run out of other people's money."
Margaret Thatcher, UK Prime Minister from 1979 to 1990
At the present time, Argentina has the most pro-capitalist government in the world.
That's not something that I ever expected to say.
After all, I've lived in Buenos Aires for over fifteen years, and have already witnessed many political and economic ups and downs. Mainly downs.
But now, for the first time, I'm pretty optimistic that Argentina has finally turned the corner, after decades of poverty-inducing economic idiocy. Once set free from the shackles of an oppressive state, the potential economic boom could be phenomenal.
Argentina's hard swing towards a capitalist model should be a great surprise to anyone that knows about the country. But, as of now, it is the reality, albeit very early days. That's ever since the new government took power on 10 December 2023, led by President Javier Milei (pronounced "milay").
Given that investing is a capitalist activity, this should be of great interest to all investors. Today, I'll explain why I believe that Argentina is likely to have an economic boom if it stays on its new track, and explain one way that foreign investors can get exposure to it.
Argentina's new ultra-capitalist president and government
Javier Milei is at the head of a political movement called La Libertad Avanza, or "Freedom Advances".
In interviews, he usually describes himself as a "liberal libertarian". Essentially, a freedom-loving freedom-lover.
Why use both words?
It's because "liberal" is the traditional description of people that want to maximise individual freedom and minimise the role of the state. It's commonly used in the Spanish-speaking world and across Europe and elsewhere. But these days, and in the USA especially, it has come to be associated with the political left, and been replaced by the word "libertarian". Using both words together covers all bases.
Of course, many pea-brained Western journalists still label Milei as "far right" or "hard right". But I've yet to see any black-shirts or jackbooted thugs marching around Buenos Aires. "Far right" conjours up images of fascists. The freedom-loving Milei is about as distant from such thugs as is possible.
Milei has also described himself as a "minarchist". This means that government should be reduced to the minimum level that is practically possible, getting out of the way of the individuals and businesses. Hence, Milei's government is extremely in favour of free-market capitalism.
Milei and his government aren't just anti-socialist, in the normally understood sense. Milei himself says he is "anti-collectivist". That is, he's against all forms of government that involve a big state, and heavy-handed interference in the daily freedoms of individuals and/or businesses. Such collectivist systems include communism, socialism, fascism and globalism (the WEF Davos crowd).
Argentina came up with its own particular, home-grown collectivist rot. This is Peronism, named after its founder Juan Domingo Peron, who first became president in 1946. It's hard to define, even by Peronists, who often just resort to calling it a "movement".
At different times Peronism has been quasi-fascist / anti-communist, or populist socialist, usually with a layer of nationalism on top.
In most recent times, Peronism was dominated by a wing called Kirchnerism, named after husband and wife Nestor Kirchner and Cristina Fernandez de Kircher, who were both president for a time.
It was very much a populist socialist model, with price controls on things like transport, food, fuel, electricity and natural gas, combined with heavy intervention in currency markets, exports and imports, plus much more.
The highly interventionist policies of the Kirchneristas led to economic stagnation, along with an increasingly bloated public sector (with jobs often created as political favours), accompanied by ever-rising rates of inflation. That's because deficits were funded with printed money, and productivity declined in the suffocated private sector.
The end result was around 50% of the population living in absolute poverty, and around 10% struggling to feed themselves every day, in a country famed for food production. In the end, the monthly inflation rate peaked at 25% in December 2023.
To put that into perspective, and applying compounding, that's equivalent to an annual rate of inflation of 1,365%. Which would mean prices going up by nearly 15 times in a year. Argentina was right on the brink of a major hyperinflation.
Enter Milei, with a radically new vision for Argentina.
His economic plan was and is to stop the money printing (he wants to make it illegal in future), drastically bring down inflation, slash state spending (he campaigned with a symbolic chainsaw in this hands), achieve a balanced budget at all times ("non-negotiable"), root out deep-seated corruption (the whole public sector is being audited), drastically cut the freedom-sapping regulations and bureaucracy that affect businesses and individuals, and simplify and reduce taxes.
It's early days, and he's only been in power for five months. But things are progressing with breath-taking speed. The transition from a broken economy to a pro-market economy means that there's an opportunity for investors.
But first, let me outline some of the basic facts about Argentina, for those that aren't too familiar with it. (After all, why would you be?)
Argentina - the basics
Argentina is the 8th largest country in the world, behind India.
Despite this, it only has a population of around 48 million. Of those, around 3 million live in the capital city of Buenos Aires, with a further 13 million in the huge conurbation that surrounds the capital, within the borders of Buenos Aires province.
Taken together, effectively 16 million people live in one city, being a third of the population. The next largest city is Córdoba (about 1.4 million), followed by Rosario (about 1 million), both to the North West of Buenos Aires.
Vast swathes of the country are virtually empty. Buenos Aires province alone is similar in size to the British Isles (the combination of England, Scotland, Wales and Ireland).
Previously a Spanish colony, the country had a revolution in May 1810 and fought a war of independence until 1818. Independence was declared on 9 July 1816.
The bulk of the population is descended from previous waves of European immigrants. The Spanish were followed by large numbers of Italians in particular (hence Argentines are said to speak Spanish with an Italian accent). There were also many immigrants from Britain, Germany, Ireland, France etc. (One of my kids used to have a third-generation Argentine teacher called Moira MacDuff, which is about as Scottish as it gets.)
This history is reflected in the grand architecture found in Buenos Aires and other cities. There are clear Spanish, Italian, French and English influences. In the old days around a century ago, when Argentina was one of the richest countries in the world on a per capita basis, Buenos Aires was referred to as the "Paris of the South".
More recent immigration has tended to come from neighbouring countries such as Bolivia and Paraguay. That's along with hundreds of thousands of Venezuelans escaping that country's socialist dictatorship, and tens of thousands of Russians since the invasion of Ukraine.
Argentina is well-known for having accepted a lot of fleeing Nazis after the second world war, during the leadership of Juan Peron (most probably in exchange for loot). What's less well known is that it also accepted a lot of Jewish refugees from war-torn Europe around the same time, and has a substantial Jewish population as a result. Just one of the country's many contradictions.
The country is rich in fertile farmland, and famous for its beef, mostly produced from breeds of British origin, such as Hereford and Aberdeen Angus (a legacy of previous British immigration here). It also produces a lot of wine, mainly in the western Mendoza and Salta provinces, and not just Malbec. Currently, the country's main exports are agricultural produce such as soybeans, soybean oil, wheat, maize / corn and so forth.
Argentina is also rich in natural gas and oil, concentrated in the shale deposits of Vaca Muerta ("Dead Cow") in the south. At a recent dinner, a senior oil executive was telling me more. The country is constructing new pipelines, and has recently shifted from having an energy deficit (oil and gas imports) to a surplus. If investment can continue, there is potential for very substantial energy exports in due course, diversifying the country's reliance on agriculture.
Other notable natural resources, concentrated in the north-west, include copper and lithium, used in batteries.
Argentina has some of the largest shale gas reserves and lithium deposits in the world. All of these resources have been under-exploited in the past, due to the high risks for investors under previous governments. Milei is taking steps to encourage large-scale foreign investment in these areas.
The major growth potential
The Argentine economy has suffered under years of maladministration and economic rot, ending in poverty and an inflationary crisis. Milei's government is moving fast to stabilise things and promote growth.
There are many factors that should promote growth over time, some in the short term, and others over a longer period.
Balance the budget (done), cut government spending further (ongoing).
Stop money printing (done), bring inflation under control (ongoing).
Build up dollar foreign exchange reserves in the central bank (ongoing, from a negative starting position).
Remove currency and capital controls, including allowing foreign companies to repatriate profits / pay dividends again. (Some progress, uncertain timing on full removal, but likely in due course.)
Return any fiscal surplus to Argentines, via tax cuts (in due course - e.g. see point 7).
Drastically simplify and reduce regulations, employment law, taxes (initial legislation currently in congress, much more to come).
Remove all or most export and import tariffs to free up trade. (Huge export tariffs penalise local producers, such as farmers, and hamper production. Protectionist import tariffs likely to be phased out, but local businesses need to benefit from reduced taxes / regulation first. Some imports already liberalised.)
With lower inflation, a credit boom is likely, as banks have confidence to lend again. (Argentina has very little private sector debt, for example virtually no mortgage lending. The first new mortgage products have already appeared over the past month or so, and there are signs of a modest up-tick in personal and business loans.)
Argentines starting to spend and invest their dollar reserves in the local economy, assuming that confidence builds over time. (Wealthy Argentines are reckoned to have about $200-300 billion held offshore, in bank and brokerage accounts and real estate. Meanwhile, a great number of middle-class Argentines have substantial physical dollar stashes, either "under the mattress" or in bank safety deposit boxes.)
There are many entrepreneurial people in Argentina. But they have to spend huge amounts of time dealing with government bureaucracy and petty regulations. If most of that time could be freed up to develop their businesses, there could be a boom in small enterprises.
Put it together, and it makes for a very potent potential combination.
This is why I believe that the country could be on the cusp of a secular (long-term) economic boom. Obviously, this depends on political developments, such as whether Milei lasts for just one presidential term (4 years) or is re-elected for a second term in 2027 (8 years total). As of now, despite short-term economic pain, his voter approval ratings remain high, and possibly even above the level of people that voted for him last year.
There are various country parallels that illustrate Argentina's future growth potential, as the oppressive state burdens are reduced and the country shifts to an increasingly free-market economic model. I came up with post-Soviet Eastern Europe, China since it adopted a capitalist economic model, and India.
To illustrate, Poland's GDP per capita was $1,731 in 1990, measured in current dollars. By 2022 this had risen to $18,688. That's up 10.8 times over 32 years, and equivalent to a compound annual growth rate of 7.7% a year.
China's shift from a communist to capitalist economic model really started in the mid-90s. Over the 27 years between 1995 and 2022, GDP per capita rose from $610 to $12,720, multiplying by 20.9 times. That's equivalent to a compound annual growth rate of 11.9% a year. This is despite retaining an authoritarian, one-party government system and plenty of limits of personal freedoms, such as freedom of expression.
India's growth spurt started around 2000, aided by business globalisation (e.g. offshoring of technology and other support services to India) and a slow shift to a less chaotic regulatory structure. Between 2000 and 2022, GDP per capita rose by 5.5 times, from $442 to $2411. That's equivalent to a compound growth rate of 8% a year.
Are those sorts of 8-12% long-term growth rates possible in Argentina in future? I believe they are, although we're still at a very early stage of the country's renaissance, and it will take a year or two for things to really pick up.
That said, Argentina is starting from a higher level than those examples above, with GDP per capita of $13,651 in 2022. However, it has all the potential to reach developed country levels within a generation.
This is because Milei's government is so pure in its desire to create a free-market capitalist economy, and pursue aggressive deregulation and cuts to government spending and taxes.
This is like Margaret Thatcher on steroids, Thatcher being the UK Prime Minister that made so many reforms between 1979 and 1990. In fact, Milei has said several times that he's an admirer of Thatcher. But I think he's got far bigger plans than she had.
In any case, if the country could achieve an average 5% real growth in GDP over the next 10 years, that would increase it by 62%. If real growth came to 7% a year, then the economy would double in size over a decade (in real terms).
Argentina is still very early in the process of picking itself up again. And there will be challenges and setbacks along the way.
For example, just last week, there was a general strike on Thursday. This shut down trains, most buses, most flights, state schools and many shops and other businesses. But not everyone joined in.
This was the second general strike since Milei came to office, as well as multiple sector strikes in recent months. Unions here are run like businesses, and sometimes like extortion rackets. Many union leaders make a lot of money out of their entrenched positions of privilege. Thus, they are opposed to any reforms that benefit society but reduce union leaders' power and incomes.
So yes, there will be bumps in the road. But Milei isn't the kind of person to change his aims or back down. He's a person of principle, who has so far done what he promised in his campaign.
Argentina's future growth potential creates an investment opportunity. How to tap into it via the US stock market is what I'll now turn to.