I want to start with an idea that we usually highlight in our meetings with international investors, but that in the local maelstrom we often forget: Argentina is implementing one of the most ambitious reform and economic stabilization programs in recent history at the global level.
This program is possible thanks to the conviction of President Javier Milei who, with a more moral than political tessitura, consistently prioritized the policies that he considers essential to create an environment of development and prosperity for the country and for Argentines.
That conviction and moral stance are the source of the mandate to the economic team, and that society revalidated in the October election. With strengthened governance and a solid macro order, we are in a position to pivot on a new turning point and project a growth trajectory that few imagined possible.
Having seen a marked improvement in fundamentals over the past two years, our main hurdle today is more psychological than technical: the germ of negative expectations. Decades of failed attempts have left us with a structurally pessimistic bias in expectations that delays the impact of the measures we take and raises the demand on their results. Expectation formation continues to be plagued by decades of abuse, in particular, monetary abuse of society.
That’s why we take an extremely conservative position: build credibility step by step. Try to take a step forward, when we consider the risk of having to take two steps backwards very low. Each mistake can cost all the effort made so far. We assess operational and implementation risks before each decision, no matter how attractive the principles of its content may seem.
The direction is clear.
After two years, the economic direction is unequivocal: more freedom, fewer restrictions and fewer regulations. Sometimes operational and implementation risks allow us to move faster; other times slower, but we never doubted the direction.
A good example is the debate that is taking place today on the exchange rate scheme and the accumulation of reserves. The fact that this debate exists in itself represents a substantial improvement, because what is being debated is the speed and degrees of freedom; not the address. We are debating how much and when we are going to float freely. The debate shifted to the analysis of the technical aspects of the implementation of each alternative. On the one hand, there is the desire and anxiety to complete the transition to a more free-market economy, and on the other, there are technical aspects such as liquidity and the structure of the exchange market. To this we add the analysis of the very particular dynamics of our exchange market and the behavior contained in the literature on safe assets, which argues that in a market like ours, the factors that would typically act as stabilizers, effectively behave as destabilizers.
Time is on our side: every day is another day of fiscal surplus, and the State withdrawing so that the private sector can do its thing. That does not mean that we must stop passing the opportunities to move forward, and cement the way.
The program we launched in December 2023 reversed the traditional sequence of stabilization programs: we attacked the fiscal deficit first. Typically, fiscal adjustment is gradual. That adjustment, which seemed impossible, unsustainable and even recessive, was achieved. Today, fiscal balance is a social asset, as valuable as any acquired right.
On the exchange rate front, it is important not to forget the starting point: we inherited a system with USD13 billion dollars in deposits, reserves in the Central Bank of USD11 billion, USD50 billion in debt for unpaid imports, and zero in cash. Today our banking system shows the highest level of deposits in dollars in its history, with USD35 billion dollars, loans in dollars practically at their historical highs of USD18 billion dollars, and a Central Bank with sufficient reserves to meet the banks’ reserve requirements. Foreign trade flows are normalized.
We went from correcting inherited imbalances to normalizing the functioning of the economy and making regulations more flexible. Eventually, this allowed us to transition to a floating scheme between bands, with minimal restriction and a clear path to full liberalization, as the bands expand and rules such as the distribution of dividends to multinationals come into force from fiscal year 2025.
The bands – with an enormous initial amplitude compared to similar schemes, of 40% – were key to anchoring expectations in the transition to a scheme based on monetary aggregate targets. It is essential to accompany the transition from a nominal exchange rate anchor to a more complex one, such as monetary aggregates. That is going to take time. The ultimate goal is undoubtedly the eventual exchange rate float and currency competition.
This is a good example where the balance of risks made us prioritize the restrictions linked to its implementation, over the principle of economic freedom that is sought to be achieved.
The next stage in the exchange rate and monetary aspects must balance two objectives: to promote a monetary balance that results in the reduction of inflation and to continue improving the balance sheet of the Central Bank with the accumulation of reserves in its assets.
These two objectives are perfectly compatible given the point we have reached: an economy with room for remonetization and a Central Bank that no longer faces remunerated liabilities to cancel.
The important thing is not to lose sight of the objectives of the economic stabilization program: sustained economic growth and the reduction in inflation. The accumulation of reserves will be a consequence of the success of the program, not its engine.
That is what was observed in all successful stabilization plans.
Reserve accumulation is a good metric to measure the success of the stabilization program. Do not confuse the metric with the objective. The objective of the program cannot be the accumulation of international reserves per se, at any cost, in a way that could jeopardize economic stability.
The key going forward, therefore, lies in the remonetization of the economy, which is still at 50% of its historical levels. In the last two years, this remonetization was evidenced in a monetary base that went from 2.5% to 4.5% of GDP, in a context of falling inflation. The trade-offs for this increase in the monetary base were: the purchase of record international reserves for almost USD30 billion dollars and the reduction of remunerated liabilities (which were 4 times the monetary base and today are zero).
If the Treasury regains access to the capital market, the Central Bank will no longer provide it with the reserves necessary to meet its payments, and the remonetization will be directly reflected in the accumulation of international reserves.
What we should not do is force the pace. The pace of that accumulation of reserves will be defined by the remonetization process, not the other way around.
In this debate on the accumulation of reserves, there are some who intend to do it through the current account. It is not what we anticipate at this stage: Argentina is still one of the most closed economies in the world. We export natural resources with supply inelastic to the exchange rate, while more than 85% of what we import are intermediate goods, more sensitive to growth than to the exchange rate.
Sustainable accumulation at this stage, until our productive structure changes, will occur in a virtuous cycle of development, not with an artificially high real exchange rate that reflects a depressed economy. A growing economy is likely to have a capital-account-financed current-account deficit, particularly as long as the fiscal balance and confidence are sustained.
Finally, and to close, I would like to make a few comments on the financial system. A financial system that has undergone structural reforms in the last two years, going through significant changes in the nominal value of the economy. The commercial debts of importers were resolved, price controls were eliminated, artificial ceilings on interest rates and compulsory credit were eliminated, public tariffs were adjusted and the rental market was liberalized, among other measures. Today, the price system reflects supply and demand, and functions as a catalyst for the efficient allocation of resources.
Argentina continues to have more financial institutions than what is observed in other comparable countries. With lower inflation and deregulation, efficiency in operation will become increasingly important. It will be more relevant in the future to achieve a specific scale or focus that works as a source of that efficiency. We anticipate consolidation in the industry and the entry of new competitors that will accelerate these processes.
In the last year and a half, credit to the private sector doubled in real terms and could do so again before reaching historic levels. We expect the expansion cycle that slowed down in the run-up to the elections to be resumed and accelerated starting in November.
In recent months, NPL levels have increased, but they still remain at levels that are within what we expected. Part of the explanation for the increase in non-performing loans is associated with the fact that we start from a very low level of non-performing loans in historical terms. If there is no credit, there is no default. Both parties, debtors and creditors, are learning again how to give and take credit. For the creditor, inflation took care of the last installments of a loan in pesos. No more. Banks are rebuilding their databases and credit history of their customers. This credit expansion cycle has new technologies and new credit originators from the fintech world. In all cases, it is an activity that has ample room to expand and that we anticipate will represent a strong demand for capital from mid-2026.
Our ultimate goal is clear:
– A stable economy, which grows with predictability.
– A reliable currency, and real currency competition.
To achieve this:
– We are going to maintain fiscal balance.
– We are going to strengthen the Central Bank’s balance sheet with reserves.
– We are going to move towards a less regulated and freer economy.
Thanks a lot.
