Javier Milei's chainsaw economics in Argentina could lead the way

Times

6 days ago

You'll no doubt have noticed the growing buzz around Europe, thanks to a brighter economic outlook, Germany's decision to scrap its debt brake, and some tactical shifts away from the US. But there's another region that's been quietly catching investors' attention: Latin America.
I believe the region could emerge as the unexpected economic winner of the next few years, and perhaps beyond.
Regular readers will be familiar with Argentina's eccentric, chainsaw-wielding president, Javier Milei, who was my economic hero of 2024. Since becoming president in 2023, Milei has slashed burdensome red tape and bureaucracy, and rolled back unsustainable and unproductive spending, while implementing supply side reforms.
The result has been an astonishing turnaround in Argentina's economic fortunes. 'Hyper-inflation' reduced to a mere 2.2 per cent as of February, with projected GDP growth of 5.5 per cent in the next year. It's no surprise, then, that Argentina-focused exchange traded funds saw record inflows in 2024, and emerging market debt funds have been hoovering up corporate and government bonds.
But Milei is far from done. With inflation now under control, last week he scrapped reporting and tax rules aimed at unlocking a potential $200 billion injection in the domestic economy, consisting of the unofficial US dollar savings of ordinary Argentines. Previously, attempts to part with this cash were fraught with risk and would have seen individuals and businesses fall foul of strict protectionist currency controls. Now, individuals will be free to spend their dollars at will.
Milei's model may masquerade as unorthodox. But chainsaw aside, it's the opposite — straight out of the 1980s Thatcher and Reagan playbook. However, it speaks volumes that, in a world of tariffs and unsustainable public spending in developed markets, Milei's Argentina is something of an outlier.
Perhaps not for much longer. Not only are many Latin American countries finally addressing bloated public spending, but it seems that significant parts of the region are shifting in a different direction from most of Europe and the US, leaning towards hawkish, economically libertarian candidates who are unashamedly banging the drum for free markets. In Chile, Colombia, and Peru, all of which have presidential elections in the next 12 months, the frontrunners are fiscal conservatives.
If the Milei model can be successfully applied across even just some of these countries, the economic bounty could be enormous, partly because the region has historically underperformed economically. Latin American countries often match or exceed their European peers in terms of the Human Development Index (HDI), which measures education, health, and life expectancy. Yet poor governance and economic policymaking have long blighted incomes and productivity levels, leading to the region's disproportionately low levels of economic development. In other words, these woes are a consequence of competence — or lack thereof — rather than structural, socio-economic challenges. It's these supply-side inefficiencies that the Milei model aims to address.
While we remain a fair way off from Latin America becoming a genuine challenger to the likes of Europe, the optimist in me wonders if we're witnessing the start of the region's long-awaited and overdue economic coming of age. Moreover, with Europe showing few signs of addressing its unproductive public spending and bureaucracy, which continue to put a ceiling on its growth, and developed Asian markets grappling with the combination of ageing populations and substantial public debt, Latin America may end up being the unexpected winner of shifting investor appetites away from dollar-based assets.
According to London Stock Exchange Group data, Latin American equity funds are up 24 per cent so far this year, which is in line with emerging Europe equities; the MSCI Emerging Markets Latin America Index is up 22 per cent. This is being attributed in part to US investors, who have historically been substantially underweight on emerging markets, taking advantage of discounted and fast-growing assets in countries like Argentina.
For now, however, the Milei model remains an exclusively Argentine phenomenon. But even setting this aside, it's clear that the wider Latin American region has the attention of certain global investors — the question is whether this can be translated into sustained and substantial inflows, rather than tactical reallocations.
At a regional level, this question depends on whether Milei's peers in neighbouring nations prove to be genuine, and whether they can effectively address public debt and productivity. But if even just a few Latin American countries were able to reach a benchmark with European nations that share similar HDI scores, in terms of GDP per capita, the economic gain could be as high as $5 trillion. While a big 'if', clearly, this would be transformative for the region and global capital flows.
Seema Shah is chief global strategist at Principal Asset Management