RBNZ Policy Meeting: 25 Or 50 Bps Rate Cut?

Central Bank

Economic

Summary:

Policy meeting takes place on Wednesday at 01:00 GMT.

RBNZ decision to cut rates

The Reserve Bank of New Zealand is poised to make another rate cut on Wednesday. The RBNZ is expected to follow the Federal Reserve with a half-point cut, as the pressure to reduce real rates at a faster tempo is being exacerbated by a sluggish activity picture and lower inflation. But while a smaller 25-bps reduction cannot be ruled out, markets may continue to favour a dovish pricing approach for an extended period, putting downward pressure on the New Zealand dollar.

Inflation slows down

The inflation rate in New Zealand has been decreasing, and the consumer price index is now approaching the RBNZ’s target range of 1-3%. This decline is the result of a decrease in domestic demand pressures and a reduction in imported inflation. It is also anticipated that the inflation of services, which has remained relatively high, will decrease as economic capacity increases.

The New Zealand economy has been showing below-trend expansion in recent quarters, while domestic economic activity has clearly and broadly weakened. The global economic situation affects this slowdown since growth in developed countries stays modest/subdued. However, encouragingly for future price stability, the RBNZ notes that business inflation expectations have fallen to roughly 2% in the medium- and longer-term horizons.

The RBNZ is expected to take a more accommodative approach considering the present economic climate. The stability of inflation expectations and the degree to which price-setting behaviour adjusts to a reduced inflation environment will determine the rate of future rate reductions.

What analysts are saying

Due to the persistent weakness and rising spare capacity in the New Zealand economy, analysts are divided on the extent of the rate cut. Some analysts advocate for a decrease of 50 basis points, while others advocate for no reduction at all. Others propose a 25-basis-point reduction, which is more cautious and accounts for the potential for upside risks in non-tradable inflation. The decision made by the RBNZ will be keenly monitored for any indications related to the future course of monetary policy.

Will this policy meeting affect the kiwi/dollar?

The anticipation of a 50-bps reduction in the RBNZ will have a detrimental effect on the kiwi. Investors are likely to price in a high probability of an additional 50-bps cut for the 27 November meeting, unless there is substantial wording against further half-point reductions ahead. Markets are not entirely pricing in such a move.

In the end, a non-tradable CPI that is slightly above the consensus when it’s released on October 15 could be beneficial for hawkish repricing and provide some relief to the New Zealand dollar. However, the turbulent risk sentiment situation resulting from Middle East tensions, in addition to potential defensive prepositioning ahead of the US elections, may limit NZD’s rebound attempts. Anything less than 50 bps in the October and November meetings would probably cause a massive move to the currency. Moreover, before the US election, NZD/USD may return to approximately 0.6100.

Currently, kiwi/dollar is experiencing a bearish correction following an aggressive pullback from the 15-month peak of 0.6380 on September 30, which resulted in a loss of more than 3%.

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Glendon

Economic

Key Data Summary:

IPO Size: $250 million

Number of Shares: 25 million

Price Range: $9 to $11 per share

Revenue Growth (2020-2023): 18% CAGR

Sectors: IT consulting, cloud computing, software development, digital marketing

The IPO market continues to attract investor interest as companies across different sectors aim to go public. One of the latest to join the fray is Click Services Limited, a fast-growing player in the digital services space. In this article, we will explore the details of Click Services Limited's Initial Public Offering (IPO), providing insights into the company’s background, its business model, and the key data points potential investors should know about.

Company Overview: Who is Click Services Limited?

Click Services Limited operates in the digital services sector, offering a wide range of solutions, including IT consulting, software development, cloud services, and digital marketing. Based in Europe, the company has expanded its reach to global markets, particularly in North America and Asia, where demand for digital transformation services is high.

Click Services has built a reputation for its expertise in developing custom software and providing end-to-end IT solutions for small and medium enterprises (SMEs) and large corporations alike. With the global shift towards cloud computing and digital platforms, the company has been riding a wave of demand for digital solutions across various industries, such as finance, healthcare, retail, and e-commerce.

IPO Details

Click Services Limited filed for its IPO in late 2024, aiming to raise approximately $250 million by offering 25 million shares at a price range of $9 to $11 per share. The IPO will be listed on the London Stock Exchange (LSE), marking one of the significant tech IPOs to watch in the UK market this year.

IPO Size: $250 million

Number of Shares: 25 million shares

Price Range: $9 to $11 per share

Stock Exchange: London Stock Exchange (LSE)

Ticker Symbol: CLIC

Use of Proceeds

The proceeds from the IPO are earmarked for several key initiatives that Click Services Limited hopes will fuel its growth over the next few years:

Global Expansion: A significant portion of the funds will be allocated towards expanding the company's presence in North America and Asia. These regions represent high-growth markets where demand for digital services continues to rise. The company is keen on setting up additional regional offices and strengthening its local sales and support teams to drive growth.

R&D and Innovation: Another major portion will be invested in enhancing the company’s Research & Development (R&D) capabilities, particularly in the areas of artificial intelligence (AI) and cloud computing. Click Services is developing a suite of AI-driven tools aimed at improving efficiency in business operations, a move expected to strengthen its market position.

Strategic Acquisitions: The company is also eyeing strategic acquisitions in complementary areas such as cybersecurity and data analytics. By integrating these new capabilities, Click Services Limited aims to provide end-to-end digital solutions to its clients, enhancing the overall value proposition.

Financial Performance

According to its IPO prospectus, Click Services Limited has shown impressive financial growth in recent years, reflecting the increasing demand for digital services globally. The company’s revenue has been growing at a compound annual growth rate (CAGR) of 18% from 2020 to 2023. The company's profit margins have also expanded, thanks to its focus on high-margin services like cloud computing and custom software development.

Key financial highlights include:

2023 Revenue: $600 million

2023 Net Profit: $80 million

Revenue Growth (2020-2023): 18% CAGR

Net Profit Growth: 22% year-over-year (YoY) in 2023

Market Opportunity and Competitive Landscape

The digital services market is expected to grow substantially in the coming years, driven by increasing adoption of cloud technologies, AI, and data analytics across industries. The global digital transformation market is forecast to reach $1.5 trillion by 2027, growing at a CAGR of 16.5% from 2021 to 2027.

As one of the companies that focus on delivering tailored digital solutions, Click Services Limited is well-positioned to capitalize on this growth. The company’s diverse client base, ranging from healthcare providers to fintech firms, gives it exposure to various sectors that are undergoing rapid digitalization.

However, the company faces stiff competition from both local and international players, including tech giants like IBM, Accenture, and Cognizant, which dominate the IT services landscape. While Click Services Limited is smaller in size, its agility and focus on niche digital solutions give it a competitive edge, particularly among mid-sized businesses that seek personalized services rather than one-size-fits-all solutions.

Risks and Challenges

Like all IPOs, there are risks associated with investing in Click Services Limited. The company’s expansion plans rely heavily on successful penetration of the North American and Asian markets, which are both highly competitive. The tech industry also faces challenges such as rapid technological advancements and the need to continuously innovate to stay relevant.

Moreover, while the company has shown strong revenue and profit growth, its future growth depends on its ability to maintain high margins as it scales. Any increase in operational costs, particularly in its global expansion efforts, could pressure its profitability.

IPO Market Sentiment

Click Services Limited’s IPO comes at a time when the global IPO market is showing signs of recovery. The London Stock Exchange (LSE) has seen several successful tech IPOs in 2023 and 2024, with a total of $18 billion raised through new listings so far. This resurgence in tech IPOs has been driven by improved market sentiment, especially as global inflationary pressures ease and central banks adopt more favorable monetary policies.

However, investor appetite for tech IPOs can be unpredictable, particularly in a market where economic conditions remain fragile. Rising interest rates, global geopolitical tensions, and uncertainties in major economies may impact the success of new listings.

Investor Considerations

For investors, several factors make Click Services Limited’s IPO worth considering:

Strong Industry Tailwinds: The global shift towards digital transformation is undeniable, and Click Services Limited is well-positioned to benefit from this trend. Its focus on high-growth areas such as AI, cloud computing, and software development enhances its growth prospects.

Impressive Financial Performance: The company’s consistent revenue and profit growth over the past few years, along with its healthy profit margins, make it an attractive investment opportunity.

Innovative Solutions: Click Services Limited’s emphasis on AI-driven tools and personalized digital services could help it capture market share in niche areas, especially among mid-sized companies that need tailored solutions.

However, investors should also weigh the risks, including the challenges associated with global expansion and intense competition from established tech giants. Additionally, market conditions at the time of the IPO could influence demand and pricing.

Conclusion

Click Services Limited's IPO presents a promising opportunity for investors looking to tap into the rapidly growing digital services sector. With its strong financial performance, innovative product offerings, and plans for global expansion, the company is poised to continue its growth trajectory. However, as with all investments, it’s crucial for investors to assess the broader market environment and potential risks before committing.

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Risk Warnings and Disclaimers

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Cohen

Economic

MIDF Amanah Investment Bank Bhd expects Bursa Malaysia’s positive market momentum to continue in the last quarter of 2024 (4Q), driven by foreign inflows, underpinned by a healthy economy and a positive corporate earnings outlook.

It noted that the benchmark FBM KLCI had a steadier climb compared to its Asean peers.

“We opine that this is due to the early start that the FBM KLCI has had, whereby it did not experience the malaise seen in 2Q.

“Nevertheless, the FBM KLCI also benefited from a turn in sentiment towards positivity. It saw respectable quarter-on-quarter gains of +5.2% (as of Sept 25) in 3Q, resulting in the index registering a double-digit gain thus far this year,” it stated.

In view of the still positive liquidity and fundamental prospects, MIDF maintains its FBM KLCI, FBM Hijrah and FBM70 targets for 2024 at 1,750 points,14,100 points and 18,900 points, respectively.

“We estimate Malaysia’s gross domestic product growth this year to be higher at 5%, tapering slightly to 4.6% in 2025.

“Likewise, we expect local corporate earnings to remain healthy going forward against the backdrop of broader economic activities (both domestic and external) amid declining price pressure and an easing interest rate environment,” it added.

In this context, consensus earnings for the FBM KLCI are projected to grow by +4.6% this year and +8.6% in 2025, leading MIDF to set a preliminary 2025 target of 1,850 points, which corresponds to a price-earnings ratio of 15.6 times.

Furthermore, the FBM Hijrah and FBM70 are projected to register robust year-on-year earnings growth of 13.2% and 10%, respectively, next year.

On the flip side, as indicated by several empirically significant indicators, it advises investors to tread cautiously and remain wary of the evolving risk of a US recession, given the recent deceleration in labour market growth.

“Moreover, we should also be mindful of the unsettling situation in Ukraine and Palestine, which could escalate rather unexpectedly,” it noted.

At its recent meeting, the US Federal Open Market Committee alluded to more interest rate cuts later this year following an initial cut of -50 basis points in September.

The interest rate futures market is anticipating two more rate cuts this year, totalling an additional -75 basis points, as well as multiple rate cuts in 2025.

“As Bank Negara Malaysia is expected to keep the overnight policy rate (OPR) unchanged in 2024 and 2025, the interest rate differential between the ringgit and the US dollar is anticipated to decline further until next year.

“A narrowing interest rate differential is among the reasons why we believe the ringgit shall strengthen further against the US dollar, with the pair forecasted to drop below the 4 level in 2025,” it added.

Source: The edge markets

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Glendon

Economic

Key Data Summary:

IPO Size: $400 million

Number of Shares: 40 million

Price Range: $9 to $11 per share

Revenue Growth (2020-2023): 15% CAGR

Net Income Growth (2023): 20% YoY

Sectors: Real estate, financial services, consumer products

The IPO market has seen a resurgence in 2023 as companies across various sectors look to capitalize on favorable market conditions to go public. One such company preparing for its Initial Public Offering (IPO) is SKK Holdings Limited. This article dives deep into SKK Holdings Limited's upcoming IPO, examining the company's background, market position, and what investors should consider as it hits the public market.

Who is SKK Holdings Limited?

SKK Holdings Limited is a multinational corporation with a diversified portfolio spanning several industries, including real estate, financial services, and consumer products. Based in Asia, the company has grown rapidly over the past decade by expanding its operations in key global markets, particularly in developing economies. Its business model is driven by both organic growth and strategic acquisitions, which have enabled it to scale across various sectors and geographies.

With the IPO, SKK Holdings aims to raise capital to fuel further expansion, particularly in its real estate and financial services segments. The company’s management believes that going public will provide the necessary financial backing and market exposure to achieve long-term growth objectives.

IPO Details

The company has filed its IPO documents with regulatory authorities and plans to raise approximately $400 million by offering 40 million shares at a price range of $9 to $11 per share. The IPO will be listed on the Hong Kong Stock Exchange (HKEX), making it one of the largest IPOs in Hong Kong in 2024.

IPO Size: $400 million

Number of Shares: 40 million shares

Price Range: $9 to $11 per share

Stock Exchange: Hong Kong Stock Exchange (HKEX)

Ticker Symbol: SKKH

Use of Proceeds

The proceeds from the IPO will primarily be used to bolster SKK Holdings Limited’s operations across three main verticals:

Real Estate Development: A large portion of the capital will be funneled into expanding the company's real estate portfolio, particularly in the Asian and African markets. SKK Holdings plans to acquire new properties and invest in ongoing development projects, which are expected to generate substantial returns over the coming years.

Financial Services Expansion: Another key focus will be expanding SKK Holdings' financial services division. The company plans to enhance its digital banking and fintech offerings, aiming to capture a larger share of the rapidly growing digital economy.

Debt Repayment: A portion of the funds raised will be allocated towards reducing the company’s debt load, improving its overall financial health and providing greater flexibility for future investments.

Market Position and Competitive Landscape

SKK Holdings Limited operates in a highly competitive environment, particularly in the real estate and financial services sectors. In real estate, the company faces competition from regional giants such as China Vanke and Sun Hung Kai Properties, both of which dominate the Asian market. However, SKK Holdings has carved out a niche by targeting high-growth regions with less saturated markets, particularly in Africa and Southeast Asia.

In the financial services sector, SKK competes with both traditional banks and emerging fintech companies. The company has made significant strides in developing digital banking solutions, positioning itself as a hybrid player that bridges traditional and digital financial services. Its fintech platform has seen strong growth, particularly in developing economies where digital financial solutions are in high demand.

Financial Performance

According to its IPO prospectus, SKK Holdings has demonstrated strong financial performance over the past few years, with revenues growing at a compound annual growth rate (CAGR) of 15% from 2020 to 2023. The company's profitability has also improved, with net income rising by 20% year-over-year in 2023. These results reflect the success of the company’s strategy of diversification and expansion into high-growth markets.

Key financial data:

2023 Revenue: $1.2 billion

2023 Net Income: $180 million

Revenue Growth: 15% CAGR from 2020-2023

Net Income Growth: 20% YoY in 2023

IPO Market Conditions

SKK Holdings Limited's IPO comes at a time when the global IPO market is experiencing a cautious recovery. The Hong Kong Stock Exchange (HKEX) has seen an uptick in IPO activity in 2024, with a total of $25 billion raised from new listings by the end of Q3. This marks a 30% increase compared to the previous year, signaling that investor confidence in the Asian market is returning.

The broader market, however, remains sensitive to macroeconomic factors such as inflation and interest rates. As central banks in major economies, including the U.S. and Europe, maintain tight monetary policies, some investors are wary of new IPOs. That said, SKK Holdings Limited is positioning itself as a stable investment with a clear growth trajectory, which could make it an attractive option for risk-conscious investors.

Investor Considerations

Several factors make SKK Holdings Limited’s IPO worth considering:

Strong Growth Prospects: With exposure to high-growth regions and industries, SKK Holdings is well-positioned to capitalize on market opportunities. Its expansion into fintech and real estate offers the potential for substantial returns.

Diversification: SKK Holdings operates across multiple sectors, which mitigates risk for investors. If one division underperforms, the other segments may still generate strong revenues, providing a layer of financial stability.

Experienced Management: The company's leadership team has decades of experience in navigating complex markets and executing strategic growth initiatives. This track record should inspire confidence among investors.

However, there are also risks to consider. The global real estate market, particularly in emerging economies, can be volatile, and any downturn in property prices could negatively affect SKK Holdings’ financial performance. Additionally, rising competition in the fintech space may challenge the company's efforts to gain market share in the digital banking sector.

Conclusion

SKK Holdings Limited’s IPO presents an intriguing opportunity for investors seeking exposure to both real estate and fintech sectors in high-growth regions. With strong financials, a clear strategy for using IPO proceeds, and a solid track record of growth, the company is well-positioned for future success. However, like all IPOs, it comes with its share of risks, and investors should carefully consider the broader market conditions and competition before making a decision.

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Glendon

Economic

As the financial world continues to evolve, Special Purpose Acquisition Companies (SPACs) remain a popular vehicle for taking companies public. One of the latest players in this arena is Launch Two Acquisition Corp., which is preparing to launch its Initial Public Offering (IPO). This article provides a detailed overview of the company, its objectives, and the market conditions surrounding its IPO.

What Is Launch Two Acquisition Corp.?

Launch Two Acquisition Corp. is a SPAC, a company created solely to raise capital through an IPO with the purpose of acquiring or merging with another business. SPACs have become a common method for companies to go public without going through the traditional IPO process. Investors buy into the SPAC on the premise that the management team will find a suitable acquisition target.

Launch Two Acquisition Corp. is following in the footsteps of its predecessor, Launch Acquisition Corp., which successfully executed a business combination. The management team for Launch Two Acquisition Corp. is composed of experienced professionals with backgrounds in finance, technology, and investment management. Their goal is to identify a company with high growth potential in a sector that could benefit from additional capital.

Key Data Summary:

IPO Size: $300 million

Number of Units: 30 million units

Unit Price: $10 per unit

Warrants: One-half of a warrant per unit

Target Sectors: Technology, digital infrastructure, fintech

SPACs Seeking Targets (Q4 2023): 470

Total SPAC IPOs in 2023: 80, raising $20 billion

Launch Two Acquisition Corp. offers an exciting opportunity, but investors should weigh the potential rewards against the risks before making any commitments.

IPO Details

The Launch Two Acquisition Corp. IPO was filed with the U.S. Securities and Exchange Commission (SEC) earlier this year. The company intends to raise approximately $300 million by offering 30 million units at a price of $10 per unit. Each unit consists of one share of common stock and one-half of a warrant. Warrants give investors the right to purchase additional shares at a later date, typically at a set price above the current trading price.

Market Focus

While SPACs can target a variety of industries, Launch Two Acquisition Corp. has expressed its intention to focus on sectors that align with the strengths of its management team. Likely targets include businesses in the technology, digital infrastructure, and fintech sectors, which have shown resilience and high growth potential.

Given the rise of digital transformation, many investors are keen to back companies operating in these industries. According to PitchBook, investments in tech and digital infrastructure have seen significant growth over the past few years, fueled by the need for companies to adopt new technologies to stay competitive. By targeting such companies, Launch Two Acquisition Corp. positions itself to capitalize on this trend.

Why Investors Are Interested in Launch Two Acquisition Corp.

Several factors make Launch Two Acquisition Corp.’s IPO attractive to investors:

Experienced Management Team: The leadership behind the SPAC has a strong track record, both in deal-making and in identifying high-potential companies. This instills confidence in investors that the SPAC will make a successful acquisition.

Attractive Target Sector: With its focus on technology and digital infrastructure, Launch Two Acquisition Corp. is targeting sectors with strong growth forecasts. This aligns with investor appetite, especially in light of the digital acceleration witnessed during the pandemic.

Warrants Offering Potential Upside: The inclusion of warrants in the IPO package adds an extra layer of appeal for investors. Warrants provide the opportunity to purchase additional shares in the future, potentially at a lower price, should the SPAC perform well after completing its merger.

SPAC Market Environment

The overall SPAC market has experienced a resurgence in recent years. While 2021 saw a record number of SPAC IPOs, the momentum slowed down in 2022 due to concerns about regulatory scrutiny and market volatility. However, 2023 has seen a cautious recovery, with more strategically focused SPACs entering the market, and Launch Two Acquisition Corp. is one of them.

The SPAC market in 2023 has seen around 80 SPAC IPOs as of the third quarter, raising approximately $20 billion. While this is a significant decrease from the 2021 frenzy, it reflects a more selective and stable market environment. Investors are now more focused on the quality of SPAC management teams and their ability to find strong merger candidates.

According to SPACInsider, the total number of SPACs seeking targets at the start of Q4 2023 was 470. This means that while the market remains crowded, only those SPACs with clear strategies and top-tier management teams, such as Launch Two Acquisition Corp., are likely to attract significant interest.

Potential Risks

Like all SPACs, Launch Two Acquisition Corp. comes with certain risks. First, there’s no guarantee that the SPAC will find a suitable target or that the eventual merger will lead to long-term profitability. Investors may have to wait a considerable amount of time before seeing a return on their investment.

Additionally, the broader macroeconomic environment, including inflation concerns and rising interest rates, could impact the success of future mergers. If the target company operates in a sector sensitive to interest rates or economic downturns, the post-merger stock performance could be negatively affected.

Post-IPO Outlook

Once the IPO is complete, Launch Two Acquisition Corp. will have a limited window of 18 to 24 months to identify and close an acquisition. If no suitable target is found within this timeframe, the SPAC will be liquidated, and funds will be returned to investors. However, given the strength of the management team and the current market conditions, many investors are optimistic that the SPAC will find a high-growth target in a timely manner.

Conclusion

Launch Two Acquisition Corp.’s IPO represents an intriguing opportunity for investors who are bullish on SPACs and the technology sector. With a seasoned management team and a clear focus on high-growth industries, the company is well-positioned to execute a successful business combination. However, as with any SPAC investment, there are inherent risks that investors must consider, particularly in a volatile economic environment.

As the SPAC market continues to evolve, Launch Two Acquisition Corp.’s performance will be a test of the ongoing viability of SPACs as a vehicle for bringing companies to public markets.

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Alex

Economic

Palm oil has lost its position as the world’s cheapest edible oil, thanks to shrinking output in the biggest growers and plentiful supply of the main alternative.

The tropical oil, which traded at a discount of US$782 (RM3,229) a ton to soyoil as recently as November 2022, is currently commanding a rare premium. In contrast to soy, sunflower and rapeseed crops, palm is harvested year-round and needs less land to produce, meaning it’s usually cheaper.

Indonesian and Malaysian palm plantations, which account for 85% of global supply, are facing challenges. Smallholders are reluctant to cut ageing trees and replant as it can take four to five years for new trees to bear fruit, compared with around six months for soybeans.

Palm prices have risen 10% this year, while soybean oil is down about 9% on better crop prospects in countries such as the US. Still, a structural shift is unlikely in the near to medium term because of palm’s unique qualities that make it attractive to many sectors.

Key users such as cookie makers, restaurants and hotels in India are unlikely to look for substitutes immediately, even as some household consumption of palm oil may shift to its rivals, said Aashish Acharya, a vice president with Patanjali Foods Ltd, one of the nation’s top edible oil importers. Indonesia’s biodiesel demand will also keep palm prices supported, he said.

The ubiquitous commodity is found in everything from pizza and ice cream to shampoo and lipstick. Animal feed producers also use it as an ingredient, while some countries process palm into biofuels.

The palm oil market may adjust once seasonal supply and demand factors kick in. Palm consumption typically drops in December and January in India, the biggest importer, as it solidifies at lower temperatures, prompting consumers to seek alternatives.

“Once festival demand in India fades and palm’s high production season in Southeast Asia gathers momentum, the premium could evaporate,” said Gnanasekar Thiagarajan, head of trading and hedging strategies at Kaleesuwari Intercontinental. “If that doesn’t happen, palm would lose its huge market share to soy and sunflower oils in India.”

Source: Theedgemarkets

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Samantha Luan

Political

Amid high debt and low growth, Argentina has ushered in another wave of poverty. The National Bureau of Statistics announced on September 26, 2024 that Argentina's poverty rate has reached 52.9% in the first half of this year, 11.2 percentage points higher than the 41.7% at the end of 2023, reaching the worst level in nearly 20 years. This means that 3.4 million Argentines are in extreme poverty this year, with a daily income of less than $1.9. However, since taking office as President of Argentina in December last year, Milley has "held a chainsaw and chopped at the bureaucracy" and carried out drastic reforms to the country's public welfare system. Why is Milley, who claims to represent grassroots voters, creating poverty on a larger scale? What's the problem with "Millenomics"?

The sources of Argentina’s economic distortions

Milley, who holds high the banner of populism, may have underestimated the complexity of Argentina's economic crisis. Argentina's economy is a complex maze. From the unrestricted "blue dollars" traded on the black market, to the complicated financial instruments launched by the central bank and financial institutions, to the export taxes and import pre-authorizations issued by the government, the unbearable fiscal and quasi-fiscal deficits, and the intertwined laws and regulations of regulation and intervention, it eventually exacerbated rampant inflation and a regrettable recession.

Argentina has a land area of 2.78 million square kilometers, ranking eighth in the world. It is rich in agricultural and mineral resources. It is a member of the G20 and the third largest economy in Latin America. Its per capita GDP in terms of purchasing power parity is at a medium-high level, and it belongs to the first group in Latin America with Chile and Uruguay, which is similar to the level of southern Europe. Its human development index is at a very high level. For a long time, Argentina has been a medium-sized power and a major power in the Latin American region. It is hard to imagine that such a country that once enjoyed high growth would fall into the quagmire of stagnant growth and economic distortion.

Untamed inflation is a prominent feature of Argentina's economic distortions. When Milley took office in December 2023, Argentina's inflation rate was "only" 211%. It reached 289% in April 2024 and fell back to 237% in August, but it was still higher than when Milley took office.

Of course, the source of this round of Argentina's inflation is not Mile. Argentina's last president Fernandez is a left-leaning Peronist. At the end of his term, the Argentine government had a huge fiscal deficit, partly due to the sharp increase in pensions and public sector wages. In addition, in order to provide basic living security for low-income groups, Argentina has adopted price control measures on the public sector. The prices of rent, medical care, transportation, public facilities, etc. are all below cost. The resulting price subsidies have also greatly increased government spending.

Because the low-rated Argentine government had difficulty raising loans from the international financial market, Fernandez could only instruct the central bank to overprint Argentina's currency, the "peso", and use the over-issued currency to make up for the fiscal deficit, embarking on the path of "fiscal monetization". In order to force Argentines to hold pesos instead of exchanging them for dollars, Fernandez took currency exchange control measures. As a result, the public was forced to hold a large number of pesos, and helpless people even hid a lot of cash under their mattresses because the actual interest earned from depositing it in local banks was negative.

Excess cash is a "time bomb", and various risks are beginning to accumulate. In essence, Argentina's excessive welfare, price controls and huge subsidies that far exceed the economic development capacity have exacerbated the government's fiscal deficit, and fiscal monetization has led to a continuous deterioration in the actual purchasing power of currency. Currency exchange control measures taken to stabilize the economic system have trapped peso cash like a flood in Argentina's inefficient industrial production system. As a result, if the peso is spent, inflation will soar. If foreign exchange controls are lifted, people will rush to exchange pesos for dollars, the exchange rate will collapse, and import prices will soar. If price controls are lifted, the price of public services will soar, and the quasi-poor people who have long relied on minimum living security will fall into extreme poverty. A social crisis is imminent.

Mile's "chain saw" reform

After Fernandez, Argentina welcomed the new president, Mille, who "wielded a chainsaw and chopped at the bureaucracy." After taking office, he liberalized prices in the public sector, canceled government subsidies used to suppress utility prices, and allowed the peso to depreciate by 54%. As a result, the consumer price index rose 1.7 times in the first three months of Mille's tenure, equivalent to an annualized inflation rate of nearly 800%.

Of course, rising prices have caused serious damage to consumers' purchasing power, but it also has a silver lining: it has weakened the domestic demand pressure caused by excess pesos. On the central bank's balance sheet, money is reflected as a liability of the central bank. In this sense, the real value of the central bank's monetary liabilities fell by nearly 38% from November 2023 to February 2024, which significantly reduced the inflationary potential of excess pesos.

Rising prices have also had an impact on fiscal financing. In the past, the central bank had to issue bonds to pay for the government's fiscal deficit. This "fiscal monetization" seriously damaged the rating of the Argentine central bank's bonds, causing bond interest rates to soar. Not only that, because the bond interest rate is high, most of the financing for the new round of bonds must be used to pay interest, which further lowers the bond rating and increases the interest rate. The "snowball effect" brought about by this vicious cycle has led to a sharp expansion of the central bank's debt, so that "fiscal monetization" and high interest rates have constituted a "quasi-fiscal" deficit recorded in the central bank's books.

The good news is that the sharp price increases brought about by the Mille reforms began to make the peso illiquid. The market found that only by buying central bank bonds could the liquidity of the peso be stabilized. Therefore, the central bank was able to issue bonds at a much lower interest rate than the previous government, thus providing itself with funds at a lower financing cost. As a result, Argentina's "quasi-fiscal" deficit accumulated due to excessive money issuance finally began to decline.

In addition to the turnaround in the central bank's "quasi-fiscal" problems, the government's fiscal deficit has also begun to decline. This is because most fiscal spending - including high-priced items such as pensions and public sector wages - is calculated in nominal prices, so when inflation unexpectedly soars, the real value of these expenditures will fall. Coupled with the freeze on public investment, the Argentine federal government has drastically cut transfers to the provinces, and the end result is a sharp drop in government spending. Therefore, after Mille took office, Argentina even achieved a small fiscal surplus in the first quarter of 2024 - the first time since 2008. The fiscal surplus means that the government does not need to go down the old path of "fiscal monetization", so the central bank does not need to over-issue pesos, and the pressure of future inflation is greatly reduced.

The rise in the price level has led to a strong dilution in public spending: real primary spending fell by 33% in the first two months of 2024 compared with the same period last year. Spending dilution has allowed the government to move from deficit to surplus in the non-financial public sector and has reduced the overall deficit (fiscal and quasi-fiscal) to less than half. In addition, the improvement in the fiscal situation has led to a sharp reduction in monetary financing, which is well below the rate of inflation.

Millet's "chain saw" reform can be summed up in one sentence: raise prices to reduce inflation. That is, raise the price level enough to dilute monetary liabilities and public spending to restore the level of international reserves. And, significantly reduce fiscal (and quasi-fiscal) deficits, thus cutting off the vicious cycle of financing fiscal revenues by printing money and fueling inflation. Millet's reform embodies a "technique" with Latin American characteristics: dilute, then adjust, and then stabilize.

The turnaround in inflation hides a new crisis

The problem is that the current temporary decline in inflation could trigger a potential crisis for the Miller government. Between November 2023 and February 2024, the price level of the Argentine central bank's monetary liabilities was diluted, i.e., its real value fell by 38%. The strong liquidity shortage caused by the dilution of monetary liabilities enabled the Argentine central bank to replenish its interest-bearing liabilities at a significantly lower interest rate and forced the market to sell dollars to the Argentine central bank to secure scarce peso liquidity.

Argentina's monthly inflation rate was 25.5% in December 2023 and fell to 4.2% in August 2024. These gains were mainly achieved through dilution and are actually very difficult to maintain in the long run. As inflation falls, the fiscal "rejuvenation" effect brought about by high inflation in the past may disappear. Of course, the contraction of liquidity has also brought strong recessionary pressure on economic growth. Argentina's economy will definitely continue to decline in 2024. The International Monetary Fund predicted in July 2024 that Argentina's GDP will shrink by 3.5% this year. It is foreseeable that lower national income will lead to lower government revenue.

The crisis will continue to expand. On the social level, unions and politicians have begun to demand increases in wages and pensions in order to restore some of the purchasing power lost due to price liberalization. The reduction in fiscal spending has led to a shrinking public sector and a worsening employment environment. At least 136,000 jobs have disappeared since Milley took office. Considering that the huge informal sector has already fallen into a deep recession, the job supply crisis may be even more serious.

Political games are also exacerbating the crisis facing Mille. Mille has reduced transfer payments to Argentina's provinces, which has upset the governors and even angered provinces such as Jujuy that are in urgent need of expanding infrastructure investment and foreign cooperation. But Mille needs congressional votes from these provinces to implement the next round of deep structural reforms. The problem is that Mille and his Liberal Progress Party are in the minority, while local forces have formed a broad opposition alliance in Congress.

Milley's voters are also wavering. Since Milley was elected president in 2023, his approval rating has remained stable at around 50%. However, a recent survey by polling agency Poliarquia showed that Milley's approval rating fell by 7 percentage points to 40% between August and September. Data from another polling agency, CB Consultora, showed that Milley's approval rating fell by 4.2 percentage points in September compared to August, falling to 46.4%. The Argentine government confidence index calculated by Torquato di Tella University also fell to 14.7% in September, the largest drop this year.

Argentina should adopt a pragmatic and balanced development strategy

Mille's "chain saw" reform diluted monetary debt and public spending pressure by liberalizing prices, thus providing a favorable macroeconomic environment for controlling inflation. However, the liberalization of public service prices, coupled with the shrinking of public sector jobs, will lead to a surge in people's living costs and a sharp drop in income, thus giving rise to Argentina's recent poverty wave.

Amid social unrest and intensified political conflicts, Milley's policy dividends began to decline, and the reform momentum fell into a more complicated dilemma. Political forces in various provinces were particularly dissatisfied with Milley's policy of reducing transfer payments, and thus continued to obstruct Milley's structural reform policies. As a minority in Congress, it was difficult for Milley and his Liberal Progress Party to forcefully promote the implementation of new policies.

During the critical period of national economic transformation when the space for internal reform is narrowing, Argentina should consider a more pragmatic and balanced development strategy, especially seeing the huge potential of globalization and South-South cooperation. On the premise of maintaining the continuity and stability of its foreign policy, Argentina should consider actively participating in the high-level global South cooperation system and opening up new external development space for economic system reform under the framework of the Global Development Initiative. The Mile government has recently taken practical actions to encourage major developing countries to increase investment in Argentina, which is a positive signal. It is believed that Mile, who calls himself a "madman", will show the global South the wisdom of governing the country based on rationality and seeking long-term goals.

Source: FT Chinese

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