This article explores the possible repercussions of Argentina’s recent election from the perspective of commodity markets. The article focuses on two core pillars of Milei’s agenda, namely dollarisation and privatization. The potential implications of dollarisation on commodity prices are examined through a macroeconomic lens, while the effect of privatization is analysed based on historical evidence.
The libertarian candidate Javier Milei has been elected president of Argentina in late November of this year. Despite the initial polls placing him second in October, he defeated his opponent, the Peronist Sergio Massa, with a wider than expected margin. Leading online media platforms like Reuters and Bloomberg were the first to read this unexpected outcome as the manifestation of the anger of Argentinian electors. In fact, a dysfunctional government, a weak peso, and triple-digit inflation might explain their willingness to bet on radical reforms and a breakpoint with the Peronist past. Javier Milei, with his extreme ideas, became the personification of this sentiment.
Dollarisation and Macroeconomic Outlook
Radical reforms are indeed what Milei is promising, with the dollarisation of Argentina’s economy and an overhaul of the Central Bank being flagship policies of his agenda. The “Banco de la República Argentina” is currently struggling to keep inflation under control. Despite the last hike of the benchmark rate in October, which is now set at 133%, annual inflation reached 140% in the same month. As for the exchange rate, the BCRA adjusted upwards the official rate in August, setting the peso at 350 to the dollar. The election outcome put further downward pressure on the value of the peso both on the official and the informal exchange rate, known as “blue dollar”, which traded at above one thousand pesos in November.
Should Milei maintain his promise to close the BCRA, it will come at a cost. Indeed, Argentina lacks capacity to convert its monetary base to dollars without adding a new pile to its ballooning debt. In fact, foreign reserves are currently in negative territory and the country has been already in talks with the IMF, its main creditor, for restructuring. However, the appointment of the moderate banker Luis Caputo as minister of the economy, signals that a dollarisation might not be the priority. So far, other rumours of possible appointments have also indicated that Milei is open to collaboration with other parties, which could dilute part of his proposals in exchange for a larger consensus.
While predicting whether or when dollarisation will be implemented is challenging an beyond the scope of this article, it is possible to speculate its implications on commodity prices. Argentina is an exporting country with foreign trade accounting for roughly one third of its GDP. Its main exports are agricultural commodities (corn, wheat, soybean, and soybean oil) and crude oil. Like many other Latin America countries, the invoices of those goods are usually denominated in dollar terms (Dominant Currency Pricing). This implies a limited pass-through of the fluctuations in the value of the peso to prices, which are sticky in the dominant currency. Thus, from a nominal standpoint dollarisation is unlikely to create a turmoil in commodity markets as those commodities are already priced in dollars. In real terms, however, dollarisation would require the discovery of the real peso to dollar exchange rate, which is right now buried by price and capital controls. Thus, the terms of trade, which reflect the number of units of exports that are needed to buy a single unit of imports, might experience a significant correction once the process of dollarisation is initiated, which in turn would increase volatility in commodity prices.
Thus, based on a theoretical approach, the process of dollarisation could be a major price shock, but it might maintain or even enhance stability in the long run.
Privatization and Prices
Another core pillar of Milei’s agenda is privatization. It is by no means clear which companies are intended to be privatized but we have hints. However, those hints have already moved the markets and are the key inputs to form our expectations on what could happen.
Notably, the first firm Milei hinted was the state-run oil company YPF, whose stock price soared after the announcement in late November. The company, which is the largest hydrocarbon producer in the southern cone, has already been privatized with a successful IPO in the 90s. However, a clear commitment from the government, which was a winning factor of the last IPO, is lacking this time, and additional pressure groups like Union leaders in the aviation industry are opposed to Milei’s plan of privatization regarding Aerolíneas Argentinas.
From a macroeconomic perspective, the nationalisation of YPF is a new chapter of the cyclical waves of private investments and of expropriation, which has characterized the political economy of the oil sector in Latin America since at least the 90s. By following a textbook approach, this time one could argue that privatization reduces the free-riding problem and increases efficiency by forcing competition, thus lowering the overall prices. However, historical evidence suggest that what happened after the privatization wave in the 90s was a convergence of oil and natural gas prices towards international prices.
Nevertheless, most of the success was due to a massive restructuring of Argentinian oil and gas distribution system, the creation of a new legal framework to regulate activities and the liberalization of trade. Therefore, Argentina cannot benefit from privatization alone: similar policies like the ones at the end of the 90s are required to allow for price convergence.
Milei’s agenda introduces uncertainty in commodity markets, the two main sources being dollarisation and privatization. This article debunked their implementations, as well as their macroeconomic implications, to illustrate their potential effects on commodity prices.