A Reactivation of activity and a greater slowdown in inflation are some of the forecasts for Argentina from one of the main US banks. They highlight that “the first year of the Milei administration has witnessed notable progress in terms of stability and the political objectives for 2025 are clear.” However, they point out that, to lay the foundations for sustainable growth, the country must release capital controls (they anticipate that the conditions will be in place in the first quarter) and have access to the market before the end of 2025.
He JP Morgan Economic Research team published the Argentina Chart Book, titled “The Forces of Fiscal Restriction” and highlights that “although Argentina stands out as an outlier in Latin America during 2024, with a year-on-year performance of 109.5%, it still we see room for valuations to expand, earnings to recover and country risk to declinein a context where there are still several catalysts that could materialize in 2025.”
Among the catalysts he mentions are the elimination of capital controls and a favorable result in the legislative elections next October. Regarding the inflationary variable, the work points out that “it is ready to fall in 2025.” They expect the price index to reach 25% in December 2025, from the 118% it marked at the end of 2024. And they add that they expect an average of 2% for the first quarter of the year.
Inflation projections
They recall that, after the publication of October inflation, President Milei announced that, if monthly inflation remains close to the 2.5% induced by the policy framework in the next two months, the monthly devaluation rate will be reduced to 1%. “Our revised forecast is that monthly inflation will average 2% in the first quarter of 2025, under the assumption that the administration slows down the devaluation. This is consistent with an end-of-year 2025 inflation of 25% year-on-year,” they anticipate in that sense.
In addition, JP Morgan indicates that the “fiscal pillar” is a key element and, on that front, points out that restriction is the rule. However, he anticipates that “the nature of fiscal consolidation will have to change from a spending approach to one based on income, due to the limited capacity to continue adjusting.” And he adds that the greater GDP growth, along with the additional income from the fiscal package approved in Congress in mid-2024, should compensate for the elimination of the “PAIS tax” and extraordinary income.
Another element that supports the work is that A revival of growth is expected. “Activity growth has returned to positive territory, with the third quarter national accounts report and the October activity index both indicating a stronger than expected recovery in the third quarter, which is extending into the fourth quarter “says the international bank.
In that sense, they expect “the recovery to continue, supported by the increase in real wages and pensions due to the slowdown in inflation, higher capital expenditures, the normalization of inventories and the solid growth of exports.” Thus, the forecasts were adjusted and project -2.6% for 2024 and +5.5% year-on-year for the year that has already begun.
Legislative elections will be key
A central element that JP Morgan points out is that in legislative elections scheduled for October 2025 approval rates and popularity of President Milei are expected to help La Libertad Avanza gain greater representation in Congresswhich would pave the way for negotiating structural reforms.
“Given the potential cost of a fragmented vote in the province of Buenos Aires (PBA), the possibility of an LLA-PRO alliance is being considered. In an optimistic scenario, the party could obtain 86 deputies (currently 39) and 21 senators ( currently 6). Thus, even in favorable scenarios, LLA would need alliances, particularly with PRO, to pass legislation,” they say.
Finallyrefer to the stocks and the possibility of lifting them. They maintain in this regard that the necessary conditions to move towards the elimination of capital controls will be in place by the first quarter of 2025. However, they clarify that “the administration has consistently indicated its aversion to any discontinuity that could jeopardize the trend of disinflation due to financial volatility.
They anticipate a gradual release of the trap with managed flotation
For the American bank, A gradual release of capital controls will help accelerate economic growth as well as the trend toward disinflation. He expects that financial inflows, favored by the RIGI framework and proximity to the new US administration, may prove to be a more relevant source of foreign exchange reserves than the current account surplus (although this depends on whether the administration decides to intervene in the foreign exchange market ).
“Following the removal of capital controls, we anticipate a managed currency floating regimeinstead of free floating. It is also likely to be macroprudential, as the experiences of other bimonetary regimes suggest,” they point out. And they add that the stabilization effort is not based on a competitive real exchange rate to ensure a current account surplus and thus raise the stock of reserves. international central bank.
Source: Ambito
