The election of libertarian president Javier Milei in late 2023 has led to radical changes in Argentina, including a shift toward market-oriented economic policies designed to enhance stability, control high inflation, run a fiscal surplus, shrink the government, and deregulate many sectors.

However, the country has undertaken many economic adjustment programs in the past without overcoming its long history of booms and busts, sharp changes in economic policies, and numerous debt defaults. Investors are asking us: Will it be different this time? Below are our answers to that and other investor questions.

Frequently Asked Questions

Why are S&P Global Ratings' sovereign credit ratings on Argentina so low, and what could change them?

Our 'CCC/C' long- and short-term foreign and local currency ratings reflect high external vulnerabilities, a high debt burden, lack of access to global capital markets, high inflation, and low monetary flexibility. We could raise the ratings in the coming year if macroeconomic imbalances and vulnerabilities decrease, setting the stage for sustainable fiscal outcomes, moderate inflation, and continued economic recovery. Under such a scenario, the government would enjoy better access to funding from external capital markets.

But we could lower the ratings if negative developments undermine the sovereign's already limited access to financing. Failure to advance difficult exchange rate, fiscal, monetary, and other reforms could lead to instability and another sovereign default.

How do you view recent economic developments, including the fall in inflation?

The economy has rapidly stabilized. Inflation has fallen to a 2.7% monthly rate in October 2024 from 25.5% in December 2023 (see chart 1). The government has run a fiscal surplus of 0.5% of GDP (till October) and a 1.7% primary surplus (excluding interest payments).

Chart 1

After contracting in the first half of this year, the economy shows signs of recovery:

• Real wages have started to rise.
• Many firms have been able to issue debt in global capital markets.
• The gap between the official and parallel exchange rates has narrowed toward 10% in recent weeks from around 60% at the beginning of the year.
• The perception of country risk, as reflected by spreads between Argentina's external commercial debt and U.S. sovereign debt, has also decreased.
• A special scheme of tax and other investment incentives in key sectors, such as energy, mining, and forestry, could encourage large investments in infrastructure and production, auguring well for energy output, exports, and GDP growth.

Are these encouraging developments enough to raise the sovereign rating?

A higher rating depends on sustaining and deepening these positive trends. Despite many encouraging signs, it is premature to conclude that Argentina will likely overcome its poor historical economic performance. The sovereign remains vulnerable to default because of the magnitude of fiscal, monetary, exchange rate, political, and other challenges.

For example, it has negative net foreign exchange reserves and lacks access to international capital markets, but it will need to make external debt payments of over $17 billion in 2025 ($8.9 billion to commercial creditors and $8.1 billion to official creditors, including $3.3 billion in interest to the IMF). Moreover, the high social costs of the prolonged economic stabilization program, which is key to boosting the sovereign's access to foreign exchange and reducing the likelihood of default, pose political risks that threaten the program's longevity.

At the same time, President Milei's political party, La Libertad Avanza, has very few representatives of its own in Congress, instead relying on support from a centrist party. The fragility of Milei's coalition raises doubt about his ability to sustain the difficult adjustment program. Over half the population is now living in poverty, up from 29% in 2017, and over half of all households receive social assistance.

Nevertheless, Milei's popularity has remained high. Many people appear willing to give him a chance to address the country's deep-seated problems. In addition, the president has been able to block at least two initiatives by congressional opponents that would have derailed his fiscal consolidation program, vetoing measures to increase spending on pensions and on public universities. He also worked with centrist parties to garner the minimum one-third of congressional votes needed to block the overturning of his vetoes.

Despite these successes, dealing with Congress will remain one of the most significant challenges facing this administration.

How does Argentina's recent history affect S&P Global Ratings' analysis?

Our analysis is forward looking, but it incorporates past developments as and where appropriate. Argentina has a history of booms and busts, sharp changes in economic policies, and failed economic stabilization programs. Its economy has been in recession for more years than any other country in the world (see table 1). As a result, its per capita GDP is now around one-third the average of high-income countries, down from 60% in the 1970s. Total factor productivity--the relationship between economic output and inputs--remains the same as in 1950.

Table 1

Poor economic performance has resulted in numerous defaults, including five defaults on foreign currency debt and seven defaults on local currency debt in the 21st century (see table 2). The latest default was in March 2024, when the government announced a debt exchange offer for US$55.3 billion in 15 debt instruments maturing this year in return for new inflation-linked peso-denominated debt, pushing maturities into 2025-2028. We deemed the exchange to be a distressed exchange, tantamount to default.

Subsequently, the government has remained current on debt servicing, but it faces large foreign currency debt service, including to commercial and official creditors, in 2025.

Table 2

Frequent sovereign defaults reflect a record of inconsistent macroeconomic policies. Our sovereign ratings on Argentina over the past three decades have remained low even during periods of economic recovery, when market sentiment was optimistic (see chart 2). Our long-term foreign currency sovereign rating on Argentina has never exceeded 'BB', which is below our ratings on regional peers such as Chile, Uruguay, Mexico, Panama, Peru, Paraguay, and Colombia.

Chart 2

How do you view the current political situation?

The government has advanced its economic adjustment program and its wider strategy to tackle the country's structural weaknesses. Milei's public standing remains high, despite fiscal austerity measures to achieve the budget surplus necessary to cut the government's financing needs and avoid incurring new debt. The administration has boosted social programs and aggressively removed intermediaries that managed the funds for many of those programs, thereby eliminating substantial corruption and diversion of funds from the intended beneficiaries.

Such policies have helped to cushion the political impact of fiscal austerity and to contain various interest groups' opposition to the government. In addition, the Peronist opposition remains weak and divided.

Despite sometimes aggressive rhetoric, Milei has shown pragmatism in negotiating with political leaders and interest groups. His party stands to gain seats in midterm congressional elections in late 2025 if inflation continues to fall and the economy continues to recover. However, the opposition could gain ground if Milei's popularity diminishes or if the economy fails to improve sufficiently.

What are the key aspects of Argentina's strategy to stabilize the economy and thereby improve creditworthiness?

Reducing inflation is at the core of the economic program, for both economic and political reasons. Argentina has pursued a pragmatic stabilization program that relies on a fiscal anchor (primary budget surpluses) and a crawling peg exchange rate to reduce inflation, thereby creating conditions for liberalizing the exchange rate and loosening strict capital controls (including import taxes and rules compelling exporters to sell 80% of proceeds to the central bank at the official exchange rate and the rest in the parallel market).

The government sharply devalued the official exchange rate in December 2023 and set up the crawling peg with the currency depreciating 2% every month. The goal was to reduce inflation quickly toward the depreciation rate, thereby limiting real currency appreciation. If inflation continues to fall, the government might change the monthly rate of depreciation to 1%.

Monetary policy has changed significantly, starting with reducing the central bank's remunerative liabilities (mainly debt it had issued to sterilize the expansion of the money supply under its previous policy of funding the government's budget deficits). The government created a new lending facility to provide short-term liquidity to the financial system, managed by the central bank but with the Treasury paying interest on any liability.

The central bank uses its policy interest rate more to influence the exchange rate (which in turn affects inflation) than as a tool to directly target inflation through the credit channel (which is very weak, given the financial system's small size). Strict capital controls have allowed the government to run negative real interest rates for a long time, facilitating a reduction in the real value of both the central government's and central bank's liabilities. In current conditions, it's not possible to set up a formal inflation-targeting policy.

How would a possible new program with the IMF affect your analysis?

A new program could boost foreign exchange reserves and perhaps the likelihood of a higher credit rating, but it is not a prerequisite for the latter. Argentina already owes around $44 billion to the IMF under its existing program. A new IMF program with fresh funds could boost the government's credibility and access to liquidity, possibly giving more scope to accelerate its adjustment program. It is not clear, however, that a new program will happen anytime soon.

What are the implications of President Milei's plans to change the structure of the economy?

President Milei has changed the terms of economic policy debate by challenging previously dominant views that prioritized a large role for the public sector in economic decision-making and production. He seeks to deregulate the economy and cut the size of government, reducing payroll. If successfully implemented, these reforms could slash the public sector's role in the economy and foster better long-term economic performance.

This would be a drastic change in a country where the public sector employs around 17% of the workforce--higher than in other Latin American countries. Total public-sector employment rose to nearly 5 million in 2021 from 3 million in 2006 as private-sector jobs failed to grow. General government tax collections rose to 25%-30% of GDP over the past decade from well below 20% until 2003, without improvement in public services.

The passage of a framework law ("Ley Bases" in Spanish) in mid-2024 set the stage for deregulation of the economy. The law delegated extraordinary power to the executive branch for one year to amend other laws to close, merge, or cut the central government's ministries and agencies. Among other objectives, it has allowed the government to undertake job cuts and abolish regulations that restrict competition or have become redundant.

What are the risks of this economic strategy?

The program has resulted in a recession, fiscal surplus, and lower inflation. The country's foreign exchange reserves remain low, even as the exchange rate continues to strengthen (albeit at a slower pace). Gross foreign exchange reserves rose to $31 billion in November from $23 billion at the end of 2023. However, net foreign exchange reserves remain negative. The lack of reserves increases the risk of instability and delays advancing toward more stable and orthodox exchange rate and monetary policies.

Exchange rate devaluation and the crawling peg arrangement might have served Argentina well by providing some predictability amid heightened uncertainty about fiscal and monetary policy. The government's willingness to sustain strong fiscal adjustment appears solid, but its political feasibility will come into question if economic activity doesn't recover soon.

Greater certainty about such fiscal policies, along with higher foreign exchange reserves, could allow the government to increase the role of market forces in determining the exchange rate. Capital account controls impose a cost, especially for nonresidents who are reluctant to invest without assurance they are allowed to repatriate dividends in a timely manner. However, these controls also keep domestic savings within the local financial system, providing stability to banks and the local currency debt market, at least in the short term.

Faster currency depreciation would help address concerns about the potential overvaluation of the exchange rate (which could undermine the long-term success of the adjustment program). We expect the current account will be in surplus in the short term due to strong oil and agricultural exports, taxes on imports, and recession, but it could become volatile if the real exchange rate appreciates significantly.

At the same time, a faster depreciation of the nominal exchange rate could also boost inflation and reverse recent economic gains, as well as undermine Milei's popularity, which remains key to advancing the adjustment strategy. Unifying the exchange rate or abolishing all capital controls could bring more capital inflows and boost the central bank's foreign exchange reserves, but doing so runs the risk of sparking higher inflation. The government is likely to weigh the trade-off and adjust policies accordingly.