With many market participants anchored by past economic failures, a reforming president and a vast new oilfield have created a unique investment opportunity in Argentina.
What follows is a diary from a recent field trip to Argentina to assess for ourselves the changes taking place under President Javier Milei. Our time on the ground in Argentina included a meeting schedule comprising some of the country’s largest companies, politicians, central bankers, economists and political analysts.
Subsequent to our visit, on Friday 11th April Argentina announced the partial liberalization of its foreign exchange regime, following the approval of a further $20bn loan from the IMF (with the US also thought to be prepared to offer an additional bilateral credit line).
This new policy will allow the Peso to float freely within a ARSUSD $1,000-1,400 band; will eliminate restrictions on individuals selling Pesos; allow foreign investors full unrestricted convertibility of future Argentinian profits; and facilitate the historic stock to be gradually converted through the issuance of central bank US dollar denominated debt.
When markets reopened on Monday 14th April, the Argentinian Peso traded down to ARS/$ 1,196 (+11%) but has subsequently rallied back to ARS/$ 1,096 (+2%), defying gloomy predictions of a currency crash on convertibility.
In a further market vote of confidence, the benchmark 10-year Argentinian government dollar bond has rallied, currently yielding 11.4% (13% pre-announcement).
During the month there was also positive news flow (higher production, reserves and lower costs) from the state energy company YPF on the key Vaca Muerta shale oil and gas deposit. For full transparency, Argonaut funds have investments in YPF, Vista, Galicia and Tenaris. And what follows does not constitute investment advice.
In Milei’s Argentina
We enter Argentina in Southern Patagonia from Chile by road. As preparation, I read a couple of books.
“The Old Patagonian Express” (1979) by Paul Theroux, a rail trip that begins in Boston and via Mexico and Central and South America, ends in Argentina. At the book’s desolate frontier destination, Theroux offers the following observation:
“The Patagonian paradox was this: to be here, it helped to be a miniaturist, or else interested in enormous empty spaces. There was no intermediate zone of study. Either the enormity of the desert space, or the sight of a tiny flower. You had to choose between the tiny or the vast... A glimpse of it told nothing.”
I also read “In Patagonia” by Bruce Chatwin (1977), a famous book of observation and story. As I travel northward from Calafate to Bariloche to Buenos Aires, I resolve to document my trip to the world’s eighth biggest country as a series of anecdotal meetings, aiming to understand the investment opportunities within the context of rapid economic change, whereby in a break with almost a century of failure, a libertarian and pro-capitalist President, was elected almost exactly a year beforehand.
“It was the kids wot won it”
“You want to know what won it for Milei?”, says the manager of an upmarket polo estancia, an hour outside Buenos Aires. “Our kids voted for him. We told them not to be crazy. He didn’t have a party. We voted for the centre-right candidate, Bullrich, who came third. Then in the desempate (tiebreaker) of course we voted for Milei rather than the Peronista, Massa. But he’s done a lot better than we expected. The kids were right.”
In the runoff for Argentine President in November 2023, Javier Milei won 14 million votes (56% of those cast), having entered politics only in 2021, on his election as a deputy to parliament, having previously gained fame as a TV economist. Milei’s victory was a decisive break with decades of failure. “I don’t like Milei but he gives me hope” says another, who, like most Argentinians we met, clearly detests all other politicians more.
Milei became Argentine President with a record absence of parliamentary support. He has only 38 “La Libertad Avanza” (LLA) deputies (out of 247) in the lower house of parliament (85 including allies) and only 7 senators (out of 72) (20 including allies). No single party has a majority. But 127 of the 247 deputies (and 24 of the 72 senators) who were elected in 2021 are up for re-election in October. With only 8 of these deputies and 6 senators belonging to Milei’s Party, and with his approval ratings and the economy steadily improving, it is expected that LLA makes significant gains, perhaps doubling its deputies and tripling its senators, but meaning it will still need alliances notably with Macri’s “Juntos por el Cambio” (JxC), to pass further reforms.
Chainsawing
Milei used a chainsaw in his election campaign as a symbol of his promise to cut the “bloated state”.
“This will be the second year in a row without a budget” says a Buenos Aires political consultant. “But in Argentina if you don’t get the budget through, you revert to the previously agreed level of expenditure. In the absence of an agreed budget, public sector workers get a pay freeze. And any budget surplus is at the President’s discretion to reallocate, which he has said he will use to remove taxes.”
So, in Argentina’s inflationary economy, failure to get parliamentary approval for a new budget automatically results in cost-cutting in real terms. Milei has also fired thirty thousand public sector workers (10% of the total), halved the number of government ministries, cracked down on transfers to local state government and spending on public works. All of this means public spending was reduced by one third in real terms in Milei’s first year, resulting in Argentina’s first fiscal surplus in 16 years.
“Governments in this country tend to be awful”
Milei is not Argentina’s first libertarian of international fame. Its most reputable man of letters, Jorge Luis Borges, was a noted critic of Nazism, Communism and then Peronism. “The Argentine, unlike the Americans of the North and almost all Europeans,” he wrote in 1948, “does not identify with the State. This is attributable to the circumstance that the governments in this country tend to be awful, or to the general fact that the State is an inconceivable abstraction. One thing is certain: the Argentine is an individual, not a citizen.”
A bird on the bank note
Perhaps because their leaders have been so universally awful, the one thousand Argentinian Peso note has a picture of the Hornero, the national bird on it, rather than any revered historic figure. In 2001, Argentina broke its dollar currency peg and defaulted on $141bn of foreign debt, in still the largest sovereign default in history.
Just before, the one thousand Peso note was worth about eight hundred pounds sterling. Since then, Argentina has experienced two decades of average annual inflation of thirty-five per cent, as permanent government deficits were funded not by international capital markets but instead central bank money printing.
Today, the one-thousand-peso note is worth about seventy-seven pence. In other words, against the Pound – which has not been a particularly good store of value – the Argentinian currency has lost ninety-nine per cent over the last twenty-five years.
Fig.1 | Argentinian Peso vs. UK Pound Sterling
Source: Bloomberg
Argentina is a cash economy with a deep distrust of its own money. Its biggest denomination note is twenty thousand pesos (worth fifteen pounds). It has stopped minting coins. And because there’s a big black-market economy – often people won’t accept cards – it’s necessary to carry a big wedge of cash (or US dollars) around.
Argentina already operates a dual-currency regime. All hard assets and substantial transactions are priced in US dollars. It is estimated that around half – just over $1trillion – of all U.S. banknotes in circulation are held abroad. I am informed that Argentina is the country outside of the U.S. with the most dollar bills in circulation. This is impossible to verify.
The safe deposit box boom
Grupo Financiero Galicia is Argentina’s second largest bank behind state-owned Banco de la Nacion, which I am told is notorious for lending to politicians (and their friends). Curiously, I discover that Galicia’s biggest fee earner is not asset management or insurance, but in fact the archaic safe deposit box:
“We have seventy-seven thousand in twenty different sizes, which can hold up to one hundred thousand dollars, for which we charge two thousand dollars a year” says our man at Galicia. “There is a waiting list and even though eighteen-billion dollars came back in the recent tax amnesty [from the unofficial economy], no one dares give up their safe deposit box.”
“Riche comme un Argentin”
Argentina was amongst the wealthiest countries in the world by the late nineteenth century, following an investment boom built on agriculture, railways, refrigeration and cheap immigrant labour. The first prolonged boom was in the 1870’s during which the economy grew 8% per annum in real terms. In 1880 British capital investment in Argentina was just £20m but by 1890 this had risen to £157m, accounting then for half of British foreign investment.
Following a failed agricultural crop and a political coup, Argentina then defaulted on £48m of debt, its first (of nine) sovereign defaults, leading to a global financial crisis, involving Barings Bank being rescued from insolvency by the Bank of England.
However, on the outbreak of World War One, which coincided with the opening of the Panama Canal, redirecting trade routes, Argentinian GDP per capita was 60% of the US, 80% of UK, 160% of Italy, 210% of Spain, 130% of Chile and 600% of Brazil.
Fig.2 | GDP per capita 1912 – Argentina vs. selected countries
Source: Maddison Project Database (2023)
And until the 1930’s, the phrase “riche comme un Argentin” was commonly used in France in the same way as “as rich as Croesus.”
Cry for Argentina
When the iconic West End musical “Evita” opened in 1978, it brought to global attention the secular beautification of Eva Peron, but also the corruption of the populist Peronist political movement, which first came to power in a military coup in 1943, then won an election in 1946. It’s been straight downhill for Argentina ever since.
According to Paul Samuelson: “In 1945 I was a young talented economist. I was at the height of my abilities. If someone had asked me what part of the earth would develop the fastest in the next 39 years, I would have said: Latin America − Argentina or Chile. There is a moderate climate there and a population with European roots… I was completely off the mark.”
In 1950, Argentinian GDP per capita was 50% of the US, 70% of UK, 140% of Italy, 230% of Spain, 140% of Chile and 360% of Brazil.
Fig.3 | GDP per capita 1950 – Argentina vs. selected countries
Source: Maddison Project Database (2023)
Today, it is 30% of the US, 50% of the UK, 50% of Italy, 50% of Spain, 80% of Chile and 120% of Brazil.
Fig.4 | GDP per capita 2022 – Argentina vs. selected countries
Source: Maddison Project Database (2023)
As early as the 1960’s, when Japan’s economic growth was thought to be miraculous and Argentina’s decline already established, the economist Simon Kuznets is supposed to have said: “There are four types of countries: developed, undeveloped, Japan and Argentina.”
In the early twentieth century, a third of Argentinians had been born abroad (the comparative figure for the USA was just 15%). Millions of people left the poverty of Spain and Italy in the early twentieth century for the riches of Argentina, only for decades later for their grandchildren to return to Europe disappointed.
The Argentinian fall from grace is unique.
If you want to see the long-term consequences of an eighty-year economic experiment in welfarism, protectionism, debt default, expropriation, and corruption, all carried out in the name of the “people”, look to Argentina.
“Before Milei”, our impressively erudite gaucho in Villa La Angostura suggests, “Argentina was simply a cautionary tale [for the rest of the world].”
Everyone in Argentina has a nickname
Everyone in Argentina has a nickname, nearly always derogatory, often based on their looks. Our mini-bus driver tells me he is known as “Garlic Head”. Pre-emptively, I say when abroad I am known as “Chuck” Norris, after the handsome 1970’s martial arts actor, whose fame, I always find, has travelled well.
Nestor Kirchner elected in 2003 was known as “The Penguin”. He was succeeded by his wife, Cristina, who is currently appealing a six-year jail sentence for corruption but is still the President of the Peronist movement. She has several nicknames, which translate loosely into English as a female dog.
There followed the reformer Mauricio Macri who was known as “The Cat” and then after suffering a loss of political nerve a more derogatory feline term.
It seems that there are more words in Spanish than English to describe the same thing.
Macri lost to Alberto Fernandez who could have been called many things but became known as “The Wife Beater” owing to accusations made by his partner, that have led to criminal charges.
After all of this, you can see how ending up with Javier Milei “The Madman” is - in historical context - not necessarily so strange or unflattering.
Vaca Muerta: opportunity underground
“Argentina has always had above ground problems notwithstanding the quality of the underground” says the top-brass at Tenaris, one of the country’s most successful corporations and a globally successful manufacturer of steel tubes for the oil and gas industry.
“I have been living here for 25 years and witnessed continued deterioration of the economic fabric. Things have radically changed. Milei is giving us an example of what can be done by reducing expenditure and taxes. We must see how long this can last. Traditionally the country has depended on an agricultural surplus, with 70% of our crop being exported, making up two thirds of our exports. The black soil in “The Pampas” is so fertile it even doesn’t need fertilizer. But now we also have a positive energy balance. Now we have Vaca Muerta.”
Vaca Muerta in the state of Neoquen, in northern Patagonia, is the largest shale oil and gas deposit outside North America, containing (according to the International Energy Agency) 16.2bn barrels of recoverable oil and 308 trillion cubic feet of recoverable natural gas) ranking it the 2nd largest global shale gas and 4th largest shale oil reserve.
Vaca Muerta (which translates as “Dead Cow”) currently produces over 500,000 barrels of oil per day (b/d), up from 450,000 in 2024 and 250,000 in 2003. This constitutes around half a percent of global oil production and two thirds of Argentinian, giving the country a growing surplus of 250,000 (b/d), which with a similar amount of natural gas being pumped, has turned the country from a net importer to exporter of energy, creating a significant trade surplus, and bringing in much needed US dollars to the country’s central bank:
“If we look around the world, where are we seeing any growth, aside from offshore Guyana and Surinam?” says Tenaris. “Argentina is unique in the energy market.”
The land around Neuquén has been producing oil for eighty years, but the use of fracking technology has seen a sea-change in production.
“Vaca Muerta is perfect for fracking. It’s a flat alpine desert, with lots of water from rivers that start in the Andes, and no one lives there”, says Vista, an independent oil producer with a long track record of success, that is now focusing all its development in the area.
“The quality of the rock in Vaca Muerta compares to the Permian [considered the best in North America] but the Permian has already drilled all its best wells so is seeing faster declines. Only 10% of the acreage in Vaca Muerta is in development, and few wells have yet been drilled, meaning that it is currently on average more productive, with its best years still to come”.
The average drilling costs for Vista and partially state owned YPF (which owns a third of the acreage) are just $5 per barrel (compared to $25 per barrel for conventional assets). This means higher profitability and lower capital intensity.
Vista, YPF and the other Vaca Muerta drillers, which include international giants Shell, Chevron and Total, could produce much more today, but the problem is lack of pipeline infrastructure to transport the energy cost-effectively to the Atlantic coast for export.
There is now a rush to build additional infrastructure. The extension to the 525km Oldeval pipeline to Puerto Rosales will increase daily pipeline capacity from 200,000 b/d to 330,000 b/d from March 2024 and 540,000 b/d by 2025.
Fig.5 | Vaca Muerta – Map of ongoing oil midstream expansions
Source: YPF’s Earnings Releases, Relevant Events & Presentations
The new $3bn pipeline Vaca Muerta South (for which foreign banks are providing 70% of the capital) connecting to a new deep water terminal at Punta Colorada will add 180,000 b/d by the end of 2026, 550,000 b/d by the end of 2027 and 700,000 b/d by the end of 2028, by which time it is estimated that Argentina will be exporting at least 1,500,000 b/d, which would rank it equivalent to Iran in the global oil market. This would bring in over $30bn (at $60 oil) to the country, resolving Argentina’s dollar solvency and currency convertibility issues.
Gas pipelines are also being built, initially replacing the need for costly winter imports, with Pan American Energy investing $3bn in an LNG liquification export terminal. However, the key for long-term, low-cost monetisation, a pipeline to Brazil’s population centres, is still on the drawing board.
It is an understatement to say that Vaca Muerta can do for the Argentinian economy what the North Sea did for the UK in the 1980’s.
River Plate
Looking at maps, I always thought Buenos Aires was on the Atlantic coast. It isn’t.
The Rio de la Plata, a confluence of the Uruguay and Parana rivers, is the widest river in the world at 140 miles and it is considered to meet the Atlantic Ocean at Punta del Este in Uruguay and Cabo San Antonio in Argentina, meaning that both Buenos Aires and Uruguay’s capital Montevideo border brownish freshwater with dangerous currents, rather than seawater beach.
Unlike Brazil, Argentina doesn’t really do beaches. I now know why.
”No Mas” to inflation
“Wage negotiations used to be once a year, then twice a year, but under the Fernandez Presidency, it became monthly, almost a perpetual negotiation,” says our man at Galicia Bank. “Living with 240% annual inflation, you cannot imagine. Inflation is the prime driver of Milel’s popularity. The people said, “No Mas.””
Inflation which was running at 25% per month when Milei became President, is just over a year later, running now at just 2.2% per month, during which time the economy contracted by just 1.7% in real terms (remarkably less than the previous year’s contraction of -1.9%).
Fig.6 | Argentinian inflation
Source: Bloomberg
But the economy is now rebounding, in the latest quarter for which we have official economic data (Q3 and Q4 2024), growing +4.3% and +1.4% (QoQ), whilst unemployment has subsequently fallen to 6.4% (from 7.7% when Milei became President). Argentina’s economy is now projected to grow 5% for the next two years with some economists projecting it to be 50% bigger over the next decade.
”Criadillas”
Imports like cars and electronics are expensive in Argentina, but it’s possible to dine out well for a fraction of the price in London. As we sit down for lunch at a famous Buenos Aires steakhouse, something on the menu catches my eye: “Criadillas” or “Testicals”
At 12,000 Pesos (£9), these are more expensive than your average “Chorizo” pork sausage at 7,000 Pesos (£5). But as every foodie knows, delicacy comes at a premium.
I check what meat. Mauricio, the waiter, who has a wonderful cadence to his voice and tells me he is a resting actor, says it is lamb, as beef balls would be too big a portion for a starter.
Unable to pass up this unique opportunity, I order a plate, which I insist comes as sharing “Tapas”. But when the plate of lamb testicals comes, one of my fellow enthusiasts takes two, another just one, so that I am left with the residual four (or if you like two pairs).
They look like brown drumsticks without the bone. I reach for the salt. I would love to say they taste like chicken, but they are spongey and perhaps unsurprisingly, nutty. Whatever the overall merits of Argentinian cuisine, I conclude that there is no reason to be nuts about nuts.
The de-corruption of credit
In a hyperinflation economy with very high interest rates there is little demand for private sector borrowing and so before Milei, commercial banks just invested their customer deposits in local government bonds, where they are compensated by high nominal yields.
But when government is a poor or even as Argentinian history would suggest a corrupt allocator of capital, then we must consider the lack of what economists call a “multiplier effect” of credit growth in the real economy.
But when government starts paying for itself and doesn’t require external finance, this dynamic changes, and the corrupt public sector stops crowding out investment: it no longer requires private capital to sustain it, meaning that as inflation and interest rates come down, those bank deposits can instead be lent into the private sector, with the increase in credit having a positive “multiplier effect” on the real economy.
And the private sector in Argentina has very little debt. For example, Galicia has 3 million customers, of which only 2,200 have mortgages. The Argentinian banks are now expecting 50% loan growth in 2025, which would normally be worrying except when it is considered that private sector debt is just 11% of GDP and banks are deposit rich with clean balance sheets. As our man at the bank says, “we have clients with no leverage, with lots of new profitable lending opportunities.”
Milei vs. Macri: déjà vu all over again?
“I saw fund managers fall in love with Argentina under Macri and when things went wrong, they couldn’t get out,” says a wily veteran bond trader, now working for the Argentinian Central Bank.
I ask what is different this time compared to the failure of Mauricio Macri (2015-2019). “Well, we have Vaca Muerto, and Milei is a force of personality, but also Macri fully liberalised exchange controls too early, so that when there was a problem, it turned into a stampede."
Argentina currently fixes its currency to the US dollar with a now 1% (from 2%) monthly depreciation. Critics of Milei highlight the slow progress on currency liberalisation, which would allow foreign investors in Argentina and its own citizens to swap their pesos for dollars, which if done in an unlimited or uncontrolled manner, the country’s central bank would find itself unable to fund, catalysing another crisis.
Critics argue that this starves the country of foreign investment (since foreigners have no visibility on taking their profits out of the country) and leaves Argentina with an overvalued exchange rate based on the US dollar, particularly compared with its major trading partner, Brazil (whose currency has recently weakened because of its own political crisis).
“Many say the Peso is overvalued but last year with this “overvalued” currency we generated a trade surplus of $18bn, which was used to pay down amortising (maturing) government debt. And since the Argentinian government is still unable to access foreign capital at an acceptable rate, it is forced to shrink its debt capital. This discipline is not present in any other country.”
“We think there is perhaps $15bn of foreign capital which wants to repatriate. The central bank is working on a plan. This can be done in an orderly fashion giving priority to new flows rather than stock of historic profits. But we will be aggressive on fiscal but prudent on the capital controls. We would rather peel off the layers of the onion slowly”.
Argentinian government debt is currently 88% of official GDP of which 57% is in foreign currency, of which 5% is with the IMF. But the average duration of Argentine debt is termed out, with amortisations that will match foreign currency exports from Vaca Muerta. So why fully liberalise exchange controls now when there is some risk, when instead it can be done later with limited risk of crisis?
Moreover, just like the UK in the 1980’s when the economy boomed but uncompetitive industries were forced to shut down, traditional exporting industries needing a weak currency or industries hiding behind import tariffs, will necessarily become uncompetitive:
“With Argentina becoming a big net exporter of energy, we might have Dutch Elm disease with a petrodollar economy, leading to significant disruptive changes to employment. We could also just bring inflation down by removing import tariffs, which would of course be what a free trade agreement with Trump would involve, but these would make large portions of the economy uncompetitive overnight”
Milei vs. Christina (the Peronist opposition)
Milei’s popularity is increasing, with 54% approving and 44% disapproving (compared to 50% and 48% when he was elected). In addition to the economic revival, Milei disbanded the protest organisations that led to almost a daily shutdown of downtown Buenos Aires; cleaned up the streets and empowered the police. It is in Milei’s view, a moral not just an economic revival.
Nevertheless, Argentinian politics, which had previously been balkanised into factions, is now largely Milei versus Christina Fernandez de Kirchner, the old Peronist lizard, who is currently seeking immunity from her jail sentence by virtue of being top of the Peronist deputy list for October’s mid-term elections. With the “PASO” primary system due to be abolished, also likely to work against the smaller parties, the more Argentina becomes a two-party system, the more it’s likely to suit Milei.
“There’s no real alternative to Christina in the Peronist party but she is not universally popular. They are divided. Anyway, it is Milei who sets the agenda, makes the political weather and the opposition is disorientated”.
“El Loco”
After almost a century of decline, scepticism and corruption, I found Argentina full of fragile hope, personified in trust in “El Loco” Javier Milei. Are we at the start of another boom-and-bust cycle, or something more enduring? Much will depend on Milei. But to paraphrase Walt Disney: “you don’t have to be mad to [be President of Argentina] but it [clearly] helps.”
Barry Norris
Argonaut Capital
London, February 2025
