Libertarian Hell

Death to taxes, regulations and the cold hand of the state...

(Center of Libertarian Hell, Buenos Aires Obelisco. Source: Creative Commons)

“Heaven and Hell seem out of proportion to me; the actions of men do not deserve so much.”
~ Jorge Luis Borges

“What fresh Hell is this?” 
~ Dorothy Parker... on hearing the doorbell

Joel Bowman, with today’s Note From the End of the World: Buenos Aires, Argentina...

It’s a cold day in Libertarian Hell, dear reader. 

Taxes – said to be, along with death, one of life’s unpleasant inevitabilities – are gradually being rolled back down at the End of the World...  

Speaking at the Catholic University of Argentina (UCA) yesterday, Luis “Toto” Caputo, the nation’s top economic minister, confirmed that the impuesto PAIS (a tax that is applied to purchases of foreign services, including purchases of foreign currency for savings purposes, and purchases made with foreign cards) will be lowered from 17.5% to 7.5% as part of a series of policies designed to return purchasing power to the free market. 

“This will contribute to lowering inflation,” Caputo told the audience of mostly faculty and students from the university’s economics department. “If we want to do something for those who have less, the most important thing is to end the scourge of inflation.” 

The decision to lower taxes, rarely seen in the developed world... never mind the developing one... was met with cheers from the nation’s business community.

“We must lower Argentine costs and take [the government’s] foot off the private sector’s head,” Caputo said, adding that, “competitiveness is gained by lowering taxes and lowering taxes helps lower inflation.”

Regulatory Retreat

The announcement came just two days after the Milei government confirmed that it will begin rolling back a whole series of taxes and regulations, including withholding requirements on the national Value Added Tax (IVA) and Ganancias Tax (Profits Tax). 

From La Nacion (translated from Spanish):

The Ministry of Economy announced today that it will eliminate VAT and profit tax withholdings on sales made by businesses and promised that in the next 30 days there will be new measures to lower the “Argentine cost” that impacts price levels. The rule, estimated at the Ministry of Finance, will be published in the Official Gazette this week and will come into effect in September.

In the Ministry of Economy, they told LA NACION that starting next month the AFIP will no longer withhold VAT and profit tax advances from businesses, which are national taxes – there are similar provincial tax regimes. The first rule included in the fiscal package set a limit, which was going to be $11.2 million. However, now, they confirmed, there will be no cap.

Then, on Thursday, the Ministry of Commerce announced the removal of additional company reporting requirements, aimed at reducing unnecessary bureaucracy. From infobae (translated from Spanish):

The national government repealed three resolutions that forced different sectors to present information to the State that was not used, with the aim of reducing the bureaucracy that weighs on companies. According to an official statement, the number of regulations eliminated by the Ministry of Commerce has now risen to 72.

Hmm... Lowering taxes... rolling back regulations... taking the state’s jackboot of the private market’s head? 

How could this be, dear reader? What fresh Hell is this, indeed?! 

Back from the Brink

As to the “scourge of inflation,” as Sr. Caputo correctly identified it... 

Long time Notes readers will recall that, back in December, Javier Milei’s libertarian administration inherited the single highest rate of inflation anywhere on the planet... a planet which includes, lest we forget, deadbeat dictator states like Venezuela, Zimbabwe and the Sudan, et al.

From a high of 25.5% in December... down to 11% by March... then single digits in April, May and June... and a new low of 4% for the month of July (the latest on record), it is no exaggeration to say the Milei government has brought the long-suffering country back from the hyperinflationary brink. (So-called “core” inflation came in at 3.8% for the period.) 

Here’s the month-over-month data, courtesy of the The National Institute of Statistics and Censuses (INDEC):

[Note: Orange dots indicate the highest – Dec., 25.5% – and lowest – July, 4% – mom rates for the series. Source: INDEC]

Among the items to see the biggest price increases in July were Hotels and Restaurants (6.5%) and Alcohol and Tobacco (6.1%). Among the items that increased less than the average were Food and (non-alcoholic) Drink (3.2%), Transport (2.6%) and Clothing and Footwear (1.6%). 

And now, the long term (year-over-year) trend has also begun to turn, down eight points since last month... but with a looong way to go. Still, it takes time to turn a ship the size of a country around. 

(Source: INDEC)

And now, what’s this? Investors looking for opportunities down here at the End of the World? 

Could it be sheer coincidence, dear reader, that Argentina’s investment risk profile has improved dramatically since Milei has managed to quell the economic tempest? Dollar bonds have risen by an average of 45% this year alone, as its Standard & Poor’s country “risk index” fell from 2900 bps to 1500 bps. (Those outliers, in case you’re wondering, are Sri Lanka and the Ukraine...)

Status Upgrade

But what does this mean, exactly? Consider that the average Emerging Market country carries a risk spread of ~700bps. What might a potential upgrade to Emerging Market status mean for Argentina?

On Tuesday, JPMorgan noted that just such an upgrade (from index provider MSCI) could trigger nearly $1 billion in investor inflows. Currently, MSCI classifies Argentina as a Standalone Market (basically, a degenerate outsider...) If that were to change, and Argentina were invited back into the investible suite of Emerging Market indices, well...

From Reuters (LONDON): 

Argentina's government under President Javier Milei has been on a major reform push and has pledged to move into "phase two" of its plan to stabilise the crisis-hit economy, with inflation in triple digits, a deepening recession, and myriad capital controls that skew trade but are in place to shield the peso.

If Argentina were to rejoin the MSCI EM indexes, JPMorgan predicted four firms would be part of the MSCI Argentina Standard Index - YPF, Grupo Financiero Galicia, Banco Macro and Pampa Energia, while the MSCI Argentina Small Cap Index would have eleven constituents.

"With an estimated weight of 0.2% in EM, Argentina would stand between Colombia and Peru in the EM Index," said JPMorgan's Diego Celedon.

If a reclassification materializes, JPMorgan estimates potential inflows could reach nearly $1 billion, including $786 million from the Standard Index and $176 million from the Small Cap Index.

And right on cue, here’s Andrew Cummins, founder of Explorador Capital, who told Bloomberg he reckons Argentina could well become one of the best global investments over the next five years: 

I believe that, in the next sixty to ninety days, we will see a signal based on the results of tax amnesty, the outcomes of the conversations happening with the IMF, and the results related to the agricultural sector's liquidation. As we get indications of success on these fronts, I believe the removal of capital controls becomes inevitable. Therefore, even before they are lifted, we will increase our position in Argentina...

I am very optimistic about the prospects for Argentina, because the size of government is being reduced. And with that, we will see the unlocking of human potential...

It’s almost as though free markets... free minds... and free people have a future after all. And if this is “Libertarian Hell,” we’re happy to call it home. 

Stay tuned for more Notes From the End of the World...

Cheers,

Joel

P.S. Thanks again to our dear Notes members, old and new. Your support helps us spread the ideas of Libertarian Hell to readers in all 50 US states and to many more in 133 countries around the globe.

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