With the release of the first batch of economic "shock therapy" policies by Argentina's new President Milai, Argentina's national debt continued its rise on Wednesday local time and set a new high since 2021. Financial markets are more positive about Milley's "bold first step".

As of Wednesday morning local time, Argentina’s U.S. dollar bonds due in 2035 had risen to nearly 35 cents (corresponding to the purchase price of 1 U.S. dollar). Before this year’s election, this target was only hovering in the early 20 cents. A handful of investors have begun betting that Argentina's economy will embark on a path of rapid growth.

Of course, the Argentinian people must first get through the immediate pain and uncertainty before testing the final results.

On Tuesday evening local time, Argentine Economy Minister Luis Caputo announced the first ten-point policy of the "shock therapy", including a one-stop change to the official exchange rate of the Argentine peso against the U.S. dollar.depreciated from 366.5 to 1 to 800 to 1, and announced that the main subsequent policy goal of the Argentine Central Bank isPromote the stable depreciation of the peso against the US dollar at a rate of 2% per month. For reference, the current black market exchange rate is about 1,000 to 1.

In conjunction with a series of measures such as cutting government jobs, cutting funding to state governments, and suspending public construction projects, this fee reduction measure roughly corresponds to 2.9% of Argentina's GDP. Additional measures such as increasing import taxes will increase the country's fiscal revenue by 2.2%.


(Luis Caputo, Source: Argentina’s Ministry of Economy)

Although expenditures will be drastically reduced, food cards and universal child subsidies, which play a social supporting role, will be increased by 50% and 100% respectively. Currently, approximately 40% of Argentina's population is poor.

As the policy was released, the IMF, one of Argentina's creditors, immediately expressed its welcome. The organization stated,These bold first actions aim to significantly improve public finances and strengthen the foreign exchange regime in a way that protects the most vulnerable in society.

The next few months will still be critical

At the beginning of this year's Argentine election, when Milai was leading the election, the market was quite concerned about his series of radical remarks. However, since being elected as president, the president, an Austrian economist who is extremely rare in global politics, has gradually put away his most radical rhetoric. Even so, there are too many variables to face as to where this "large-scale economic experiment" that is destined to go down in the history of economics will go.

William Snead, a strategist at Spain's BBVA Bank, said that investors regard the policy announced on Tuesday as "the first step in the right direction." Although there is a lot of optimism now, the next few months will be very important.Inflation will soar, and the reduction in fiscal spending will also have an impact on the economy. The next step is to be tested by reality.

At the same time, considering that Milai's party has little roots in Argentina's Congress and has very limited control over local governments, this also raises two questions: Can his policies gain support from the legislative body? After cutting funding to local governments, can local governments follow suit and drastically cut expenditures? Will it pose a hidden danger to the future of local government bonds in Argentina?

Alejo Costa, chief Argentinian strategist at BTGPactual Bank, explained that the initial batch of fiscal policies will provide comfort to the market, but investors will soon demand more details to understand the full impact of these policies.