Argentina

Economy to grow in 2025, after a two-year recession

In 2025, GDP will rebound after two years of recession. The trend should be mainly underpinned by household consumption (67% of GDP) as easing inflation enables partial recovery of purchasing power, together with an expected lower unemployment rate. In addition, gross fixed investment (19% of GDP) is also expected to improve owing to a low comparison base that was notably affected in 2024 by the freeze in public works. The improvement should be led by the private sector and encouraged by a relatively stronger business environment. The Large Investments Incentive Regime (RIGI), part of the Ley Bases which aims to stimulate investment through tax, customs and exchange benefits, which has enjoyed legal and regulatory stability for 30 years, will exercise a positive influence with the potential to attract investment, mainly in mining and oil and gas sectors in the Vaca Muerta shale field. However, its potential will remain somewhat limited if capital controls persist as they inhibit the entry of foreign capital due to restrictions on it eventually leaving the country. Meanwhile, public investment will remain weak, as foreshadowed in the 2025 National Public Investment Plan (estimated at 0.6% of GDP in 2025, similar to 2024). Public consumption (16% of GDP) is expected to register a second year of contraction, albeit to a lesser degree. Last, net exports should contribute negatively to GDP in 2025. Exports (11 % of GDP) are expected to grow at a slower pace, hampered by a high comparison base – agriculture exports recovered strongly in 2024 from La Niña’s side effects in 2023 – and by lower growth trends expected in main export markets (Brazil and China).

In addition, investors are concerned that the peso is becoming overvalued. After the initial 54% devaluation of the ARS in December 2023, the local currency has devaluated by 26% against the US dollar (due to the 2% monthly crawling peg), which is well below the 112% rise in consumer prices accumulated in the year until November 2024. While such a landscape bodes well for tempering inflation, a higher real exchange rate tends to reduce the competitiveness of industrial exports and to incentivize imports. In addition, this comes at a time when Brazil has undergone strong exchange rate depreciation. While Argentina´s real effective exchange rate appreciated by 40% in the year until October 2024, the Brazilian real depreciated by 13% over the same period.

External account to turn narrowly negative and fiscal consolidation to remain on track

In 2025, the current account will likely switch to a slight shortfall, notably hampered by a lower trade surplus. The rebound of domestic activity along with the appreciation of the real exchange rate will support a faster growth in imports than in exports. In addition, the rules have been relaxed for access to the official foreign exchange market (MLC) for payment of imports. Since 21 October 2024, goods that were previously subject to payment terms of up to 60 days can be paid after 30 days after customs registration. The service deficit should also widen somewhat as a result of a wider shortfall in the travel account due to the loss of competitiveness of local versus international tourism. The situation can be explained by the more overvalued ARS and the elimination the PAIS tax in December 2024, which had applied a surcharge of 30% on card purchases in dollars (although a similar surcharge of 30% will be maintained, the so-called additional payment levied on Profits and Personal Assets). On the financing side, FDI should make a comeback with the RIGI and a relatively improved business environment. However, FDI will stay low due to the overvalued exchange rate and capital controls. Meanwhile, the lack of foreign currency reserves has become less acute, although the latter remain at a very low level. In November 2024, gross reserves stood at around USD 31 billion, well below the USD 47 billion threshold considered adequate by the IMF. More important, net reserves (excluding hard-currency liabilities, Bopreal series 2 amortisations, USD bank reserve requirements and foreign exchange swaps with China) have risen from around negative USD 11 billion to negative USD 5 billion. Timing the move to lift exchange and capital controls (the so-called cepo) will prove key in 2025. President Milei stated that the removal of controls is subject to an agreement with the IMF on a new programme or with private institutions to build up reserves to cope with possible pressure from resulting exchange rate depreciation.

On the fiscal front, authorities will remain committed to keeping a primary surplus sufficient to pay debt interest, and, consequently, balance the budget, to thereby avoid monetary financing of the fiscal deficit by the central bank, which was the primary cause of inflation over recent years until 2024. Along with the Ley Bases, a watered-down fiscal package was also approved by Congress in mid-2024 which lowered the income tax floor and provided changes in the personal goods tax. The initiative is expected to raise tax revenues by roughly 0.5% of GDP per annum. In addition, Milei’s refusal to allow for the 2025 budget to be debated in Congress (which probably implies the 2023 budget will be prolonged for a second year) has left several provincial governors up in arms. In so doing, he aims to maintain control over public accounts as the government faces obstacles in Congress such as strong demands for increasing funding for public works and transfers to local pension funds, for example.

Moreover, the President pledged to speed up the chainsaw approach in 2025 through a comprehensive audit to be conducted in the attempt to make historic public spending cuts. This, together with the economic rebound (contributing to a higher tax collection), should help offset the shortfall caused by elimination of the PAIS tax in December 2024. Regarding financial obligations (amortisations plus interests) in 2025, the government faces foreign currency payments of USD 29.6 billion or roughly 5% of GDP (including USD 2.9 billion in interest to the IMF). In this context, an agreement with the IMF on a new programme or with private institutions will be crucial. Additionally, it will face roughly 16% of GDP in local currency debt amortisations, which stresses the importance of keeping a zero deficit and being able to rollover the debt.

Looming midterm elections, an opportunity for Milei to increase representative power in the legislative sphere

The ultra-liberal Javier Milei completed one year in office in December 2024, garnering a relatively high public trust in his government. In that month, the government's popularity stood at 53%, only 7% lower than in December 2023. In fact, this level of popularity is higher than under former governments after the same time in office. This creditable achievement can be attributed to the economic accomplishments reached during the first term of office (notwithstanding the short-term side effects such as a rise in the poverty rate). The improvements include the sharp fiscal consolidation under way, easing inflation (after an initial spike in prices), narrowing of the spread between the official and the parallel exchange rates (roughly 18% at end-December 2024), improvement in the foreign currency reserves and the easing of import payment rules. Importantly, retaining adequate popularity is also crucial as the October 2025 midterm elections approach. So far, the government has used executive powers through Decretos de necesidad y urgencia (DNU) to get around its minority position in Congress (the ruling La Libertad Avanza party holds only 15% of seats in the Lower House and 8% in the Senate) and amend one hundred laws. The government has lowered utilities subsidies (restricting them to the most vulnerable segments of the population), cut back on the number of public employees, reduced discretionary transfers to the provinces and deregulated private sectors such as internet, telephone and private medical services, among others. Importantly, despite the lack of a majority in Congress, the latter could not block the government´s 46 DNUs (only one was blocked by the Justice Department). Overall, the government has succeeded in getting his reforms approved, and Milei’s vetoes on legislative initiatives have been sustained thanks to a disparate coalition. At the October elections, half the seats in the Lower House and a third of the seats in the Senate will be renewed. Improving the ruling party’s weak position in Congress would pave the way for structural reforms. The president has stated that the 2025 elections will test the approval of his administration and the country's current path. Owing to the negative social consequences of the ongoing adjustments, any economic setback – especially in the fight against inflation – could prove devastating for President Milei’s aspirations. For 2025, Milei announced that the government would pursue tax reforms to reduce the number of national taxes by 90% and return fiscal self-government to the provinces. An open currency market would also effectively begin. Argentines would be able to use the currency of their choice for everyday transactions, except for paying taxes.

Javier Milei also promised to pursue a free trade agreement with the US and push to update the Mercosur trade agreement by eliminating internal trade barriers and reducing the common external tariff. Despite some political alignment with the incoming Trump administration, the net benefits for Argentina are unclear. Closer ties with the US could make it easier for Argentina to broker a new agreement with the IMF as Washington has the largest voting power in the institution. It could also help in attracting investment: for example, Elon Musk is reportedly interested in Argentina’s lithium as the country is the world's fourth-largest producer of the white metal and harbours large untapped resources. That said, a free trade agreement does not seem feasible as the Mercosur trade agreement prevents its members from entering into individual trade agreements. Furthermore, economic policies under the US administration could push the dollar higher and put pressure on the peso.

Last updated: December 2024