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“Argentina Is on a Path to Economic Success”, Nouriel Roubini

In 2006, Roubini warned that a housing bust would trigger a global banking crisis and deep recession within a few years. U.S. subprime collapse spread through the financial system

While many commentators have criticized Argentine President Javier Milei's draconian approach to economic reform, the results of the October legislative election show that the Argentine people would prefer short-term economic pain over a return to Peronist policies. Milei now has a clear path to finish what he started. The piece was written by Nouriel Roubini, one of the very few economists who anticipated the 2008 world recession and has been identified as Dr. Doom because of his forecasts *

Heading into Argentina’s legislative elections this month, commentary about the country’s economic and financial prospects was growing increasingly pessimistic. With a significant amount of foreign debt coming due next year, the conventional wisdom was that an exchange-rate-based stabilization program – letting the currency depreciate by less than the inflation rate to push inflation down – had led to a massively overvalued currency and an external deficit that was bound to precipitate a crisis. But having written a book on currency crises in emerging markets, and having followed Argentine policies closely, I thought this consensus was far off the mark.

Breaking from the pattern of past failed economic-stabilization episodes – including those under previous Argentine administrations such as Carlos Saúl Menem (1989-99) and Mauricio Macri (2015-19) – Argentine President Javier Milei used his 2023 election victory to implement the strongest fiscal-austerity and structural-reform policies in the country’s history. In 2024, the primary fiscal adjustment (excluding interest payments) amounted to 5% of GDP, setting the stage for a strong economic rebound after some early softness.

At that point, the Argentine peso may have been modestly overvalued, given the lack of a fully flexible currency regime, but at least the current-account deficit was very small. If the country regained market access, it could roll over its looming external debt liabilities; and if electoral uncertainties could be overcome, Milei’s reforms and the country’s huge natural-resource endowments were bound to attract huge amounts of foreign direct investment (FDI) – possibly as much as $70 billion (including financing for a US$ 25 billion OpenAI data center). Moreover, the inflation rate had already dropped dramatically from over 100% before Milei’s election to around 30%.

Thus, heading into the recent legislative election, Argentina’s problem was about liquidity, not solvency. With electoral uncertainties weighing on growth this year – especially after the Peronist opposition performed better than expected in Buenos Aires’s provincial election in September – investors had grown nervous. Following a couple of corruption scandals and tactical mistakes on Milei’s part, the peso had weakened, despite interventions to keep the exchange rate within a set band. Domestic interest rates surged, Argentina’s sovereign spread widened significantly, and the stock market weakened. If the Peronists could take enough seats to wield an effective veto, Milei’s entire reform program could unravel.

But since Argentina’s problem was merely about liquidity, Milei sought and received a controversial US$20 billion swap line from the US Treasury, whose support was conditional on him prevailing in the election. In the event, he and allied parties triumphed, picking up seats in both chambers. By fixating so much on electoral uncertainty, Milei’s political links to US President Donald Trump, and an overvalued exchange rate, the financial commentaries had ignored the promise of his radical fiscal and other reforms.

Now, for the first time in ages, Argentina may escape the policies that have repeatedly driven it into debt defaults and high inflation. After the most recent Peronist administration had pushed the country close to an inflation spiral and another default, Milei started cleaning up the mess with ruthless efficiency. While many have criticized his draconian approach, the results of the October election show that the Argentine people would prefer short-term economic pain over a return to Peronist policies.

Milei will now reach out to other moderate forces to build a coalition that can continue his program via legislation, rather than decrees, starting with labor-market and tax reforms. Further economic liberalization will then attract a surge of domestic and foreign investment, ensuring strong economic growth for the future. While no economic policy package is perfect, Milei’s overall approach is sound, especially compared to the failed policies of the past.

Yes, the exchange-rate regime will have to become more flexible over time. But proposals for an immediate shift to a fully floating exchange rate or (at the other extreme) full dollarization do not make sense. The first could lead to excessive exchange-rate volatility, especially once capital controls are fully phased out, while the latter – endorsed  by major media outlets like the Wall Street Journal – is not even feasible, because Argentina does not have sufficient foreign-currency reserves. Milei, a vocal libertarian, may have flirted with full dollarization in the past, but he now recognizes that it is not really an option.

The better option is a currency regime that would allow fluctuations within a wide band, perhaps with targets based on the nominal effective exchange rate together with some monetary aggregate to anchor growth. That would limit volatility while still ensuring that the currency value is competitive, and the external balance positive. The returning flows of capital and new FDI could be used to replenish the country’s dwindling foreign-exchange reserves, lest they drive unwanted currency appreciation.

The market reaction to the October election confirms that investors are on board with Milei’s strategy. The panic leading up to election day was not about him, but about the prospect of a Peronist return. With the recent electoral uncertainty behind it, Argentina now has a clear path to political stability.

We will likely see significant inflows of FDI, allowing growth to accelerate over time. Argentina may even become a model for the kind of market-oriented economic reforms and fiscal austerity measures that are needed in other Latin American economies, such as Chile, Brazil, and Colombia – all of which will hold elections in the coming year. (Project Syndicate)

* Nouriel Roubini, a senior adviser at Hudson Bay Capital Management LP and Professor Emeritus of Economics at New York University’s Stern School of Business, is Co-Founder of Atlas Capital Team, CEO of Roubini Macro Associates, Co-Founder of TheBoomBust.com, and author of Megathreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them (Little, Brown and Company,  2022). He is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration and has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank. His website is NourielRoubini.com, and he is the host of NourielToday.com. Nouriel Roubini