Moody’s Investors Service analyzed the keys that the new winning economic management will have to face after the runoff between Javier Mileifrom La Libertad Avanza, and Sergio Massafrom Union for the Homeland.
In the midst of the economic situationalready complicated that the country is going through In economic matters, the risk rating agency issued a report in which analysts warn that there could be a worsening of the local crisis.
In this sense, the firm hopes that inflation rises to 275% next yearcompared to an approximate 150% for 2023 and considered that the “Central Bank is losing control of the macroeconomic situation”, after raising the interest rate to 133% last October, “almost double that of January.”
In its most recent report, the risk rating agency predicts a drop in the Gross Domestic Product (GDP) of 3.5% and 2.5% in 2024, “before returning to tepid 1.5% growth in 2025.” For the firm, the economic results for the coming years will depend largely on the policy taken by the future government and warns: “Regardless of the result of the November 19 electionswe predict that the new administration will have enormous difficulties in correcting fiscal imbalances and external factors that support the country’s enormous economic challenges,” the document closes.
Runoff: Moody’s analysis
For the rating agency, voters face a difficult election on November 19. The two main candidates, Sergio Massa and Javier Milei, offer “very different” visions on how to address economic problems. Massa has adopted a pragmatic approach that includes deepening the relationship with the private sector and, at the same time, support some government measures, as well as price controls, “that maintain macroeconomic distortions.”
Milei, on the other hand, proposes a drastic change in policies to address social and economic problems. His proposals include cut public spending by 15% by eliminating government expenses and ministries, as well as privatizing state-owned companies. His most prominent idea “is to completely dollarize the economy and eliminate the Argentine peso and the Central Bank of the Argentine Republic (BCRA) as a way to control inflation.”
Regardless of who wins, Moody’s solves, The new president will face an inevitable macrofiscal adjustment due to significant macroeconomic and fiscal imbalances. Political uncertainty is very high, “even for a country accustomed to financial volatility and disorderly policies, due to the clearly opposing visions offered by the candidates and the magnitude of the economic problems.”
- If Massa wins, he is likely to adopt a gradual approach to adjustment that prioritizes political considerations over economic policy to stop the decline in international reserves. “This could lead to a delay in resolving macroeconomic issues and increase the risk of a sovereign credit event.”
- If Milei winsit is likely to adopt a more forceful approach to adjustment that includes measures such as the dollarization of the economy and the cutting of public spending. “This could lead to a sudden economic contraction and increased social unrest, but could help solve long-term macroeconomic problems.”
The implications of the presidential elections in various sectors and at the sovereign level:
Business sector: The credit quality of non-financial companies will worsen due to economic problems. Capital controls make it difficult to refinance external debt, and this increases credit risk.
Banking sector: Sovereign exposure increases banks’ risk, while political uncertainty puts pressure on deposits. While there is a risk that profits will not be sufficient to replenish capital in real terms, banks’ capital and liquidity support their credit quality.
Public sector: There will be rate changes and subsidies in public services, the energy sector and regional governments. For utilities, there is some concern around customers’ ability to pay, which will make any structural change difficult. In the energy sector, subsidies, government intervention and investment in renewable energy will continue under a Massa government. As for local and regional governments, a Milei government will likely give provinces more fiscal autonomy, but their ability to achieve this will be limited.
Sovereign: Economic distortions increase the risk of a sovereign credit event occurring in 2024-2025. The result of the runoff will determine whether the economy is prepared to face a prolonged period of gradual deterioration, either under the government of Sergio Massa, which will adopt minor corrective measures to avoid political and social unrest, or the government of Javier Milei, which will will be constrained by governance challenges that will hamper its ambitious reform agenda.
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