J. SAFRA SARASIN: Argentina, foreign direct investment to the rescue
7 JUL, 2026
By Mali Chivakul from J. Safra Sarasin
Since President Milei's victory in last October's midterm elections, his government has helped further stabilize the economy and has pushed ahead with additional structural reforms. The fiscal surplus has been maintained, inflation has slowed, and international reserves have risen. In March, the landmark labor market modernization law was approved, aimed at tackling the long-standing rigidity of the labor market, which has long contributed to segmentation and a large informal sector. The bill seeking to abolish or amend more than 70 outdated and redundant regulations is moving through Congress. The commitment has paid off: at the end of May, the IMF completed the second review of its program with Argentina. Earlier this month, S&P raised Argentina's sovereign rating to B-, following Fitch, which had made the same move in early May.
On the external front, rising commodity prices have fueled an export boom. Argentina's trade surplus has grown thanks to increased exports across all sectors, while imports have remained stable. May's trade surplus of $3.5 billion was in fact the largest on record. This has supported the central bank's dollar purchases, a key indicator for external stabilization and for the IMF program. The Large Investment Incentive Regime (RIGI), introduced in 2024, has also attracted more foreign capital into the extractive sector, as countries around the world rush to diversify their energy and critical minerals supplies. Argentina's agricultural exports are also expected to perform well over the next 12 months, partly thanks to this year's El Niño phenomenon, which should bring more rainfall to the country.
Economic activity, however, has suffered from the restrictive fiscal and monetary policies needed to stabilize the economy. This year has brought further signs of improvement, but the path remains uneven. Industrial production has recovered, but other indicators, such as retail sales, have remained weak. Over the past two months, consumer confidence has begun to recover from low levels. The unemployment rate remains high, at nearly 8%, and has ticked up slightly since the end of last year. It will likely take time before structural reforms bear fruit and drive more sustained growth.
More sustained growth will likely depend on new foreign direct investment (FDI) flows. As of June, 16 projects had been approved under the RIGI regime, worth around $30 billion. Most of these projects are in the mining sector (extraction of lithium, copper, gold and silver), while others involve energy infrastructure (solar power, pipelines, LNG). These projects are expected to get underway shortly. Other projects are awaiting approval. The government has recently submitted a "Super RIGI" bill to Congress, aimed at promoting even larger investment projects (projects of $1 billion, compared with the $200 million threshold under the current RIGI regime). According to the IMF, most successful macroeconomic stabilization programs have seen a significant increase in FDI roughly three years after the program begins. For these countries, FDI has not only been an important growth driver but has also helped finance external needs.
The government missed the opportunity to issue dollar-denominated bonds in international markets earlier this year, before the outbreak of the war in the Middle East and the tightening of external financial conditions. The government would like to issue international debt at lower interest rates, and is now relying on a mixed bag of domestic and other non-market debt to finance this year's debt servicing. It is currently seeking to secure $5 billion in financing with the help of multilateral banks ahead of the debt service payment due in July (of roughly equivalent size). The World Bank has already approved a guaranteed financing package to help mobilize up to $2 billion in commercial loans. It is also reportedly negotiating with the People's Bank of China to extend the currency swap line.
Argentina's foreign debt management strategy should hold up in the short term. However, debt service obligations in 2027 are slightly higher than in 2026, and a mixed bag of non-market solutions is not a sustainable answer. Taking advantage of high commodity prices, the central bank will likely continue to build up reserves. Bond issuance in international markets in the second half of this year should see strong demand, on the back of the improved credit rating and prospects for further spread compression. Argentina's sovereign spreads have narrowed to around 430 basis points, closing the gap with Ecuador (currently at 410 basis points, with the same rating profile).
The next risk event is the October 2027 presidential and parliamentary elections. Modest growth and corruption allegations against members of Milei's cabinet have pushed his approval rating to its lowest level in three years. The recent disinflationary momentum and the economic recovery underway since March have brought approval back up to around 40%. The public remains concerned about inflation and employment. While we expect the disinflation trend to continue, the next phase — bringing annual inflation down to a single digit — is typically slower, as it takes time for inflation expectations to adjust downward. Milei's bet on foreign investment should help boost growth, but the mining sector is not the biggest job creator.
We remain optimistic about Argentina's path. An international bond issuance by year-end would significantly reduce short-term default risk. A faster pace of FDI implementation should boost economic activity and increase net international reserves, while other structural reforms are likely to bear fruit in the second half of next year.
