How austerity proved to be a winning ticket for Milei
The Argentine president’s economic polices may have secured him his election victory
There was no trademark chainsaw in President Javier Milei’s hands as he celebrated his party’s landslide victory in Argentina’s mid-term congressional elections. He wasn’t even wearing his idiosyncratic leather jacket, opting instead for a suit and tie.
But that didn’t mean the fanatical free-marketeer and political bedfellow of Donald Trump was backing away from his radical reform agenda.
“Today, we have passed a turning point,” Milei told his cheering supporters. “We will not only defend the reforms that have been made, but we will also promote the reforms that are still needed to achieve that future ... to make Argentina great again.”
Milei said 10 million Argentines had voted on Sunday for his La Libertad Avanza party and its allies. Local commentators said this had given the previously embattled leader “a blank cheque” to press on with his singular economic experiment.
Barclays analyst Ivan Stambulsky noted that almost half of voters, on an admittedly low turnout, had opted for “macroeconomic prudence” over a return to the spendthrift Left-wing parties.
“In our view, this is another clear signal that voters remain wary of a return to large fiscal deficits and an economy riddled by administrative controls,” he said.
Milei-supporting parties will, from December, hold 104 seats in the 257-seat lower house. That gives him more than the one third share of deputies he needs to uphold any presidential vetoes, along with a strong prospect of striking deals to reach a majority in key parliamentary votes.
“The result represents a major inflexion point, paving the way for Milei to press ahead with his ambitious reform agenda, and putting recent setbacks behind him,” said Christine Reed, of fund manager Ninety One.
With so much wind now in his political sails, Milei has the chance to complete the project he started after storming into the presidency in December 2023.
He won office on a promise of “shock therapy” – a form of austerity on steroids. He would take a metaphorical chainsaw to public spending and he would liberalise the exchange rate, turning Argentina into an export-driven economy that could, at last, tame inflation and service its debts.
In phase one, Milei devalued the official exchange rate to align more closely with market rates, using strong-arm tactics to overcome adverse parliamentary arithmetic.
This initially fuelled record monthly inflation of almost 26pc, but by mid-2025 the rate was under 2pc a month.
He halved the number of ministries, slashed the civil service headcount and its spending, abandoned infrastructure projects, stripped back labour laws, put state-owned firms on the sales block, and rewrote the tax code. The budget went into surplus for the first time in a decade.
In phase two last year, Milei shifted some responsibilities for supporting commercial lenders from the central bank to the Treasury. This ended a tendency to print money as a way out of periodic crises and put monetary policy on a more normal footing.
Rating agencies began to give Milei’s Argentina a more positive report card. The International Monetary Fund (IMF) has forecast economic growth of 5.5pc this year, after a 1.3pc contraction last year.
In phase three, which began in April, he began to normalise Argentina’s trade and investment relations with the outside world. This was backed by $20bn (£15bn) from the IMF, and a renewed $5bn currency swap arrangement with China.
But holding the peso within a price band – and at an artificially high rate that stopped imports from triggering inflation – came at a cost. Argentina had to repeatedly use its central bank’s dollar reserves to buy pesos and stop the rate from falling.
This led markets to question whether the peg was sustainable – particularly as Argentina would need those reserves to help meet $45bn in debt repayments because of foreign creditors by the end of 2027, including $8bn by January next year.
Investors began selling off the peso and government bonds. This threatened a doom loop as Milei was forced to spend more of his reserves to support the currency. This could push Argentina back into the kind of debt default crisis that has chequered its history.
Meanwhile, Milei was facing a series of political scandals and setbacks. His sister, who serves as his chief of staff, was caught up in allegations of corruption. He lost ground in a Buenos Aires regional election, as street protesters decried spending cuts in health and education.
Trump and Scott Bessent, his treasury secretary, sensed the danger to their ally and began work on a bailout. The White House has now orchestrated a $20bn currency swap line and has looked to buy pesos and broker $20bn of private loans.
This came at some political cost to Trump. Several Republican senators asked why the president was supporting a country that was supplanting the American Midwest as the primary supplier of soybeans to China.
But his gamble seems to have helped calm the markets, and Milei has now won an electoral mandate to press on with his unique economic reboot.
The markets are rallying to his cause. Investors bid up dollar-denominated Argentine government bonds in early trading, pushing 2035 debt prices to a record high. The peso surged 10pc.
Still, Argentinians have felt the pinch from a higher cost of living and reduced social spending. This means Milei cannot necessarily take the public’s support for granted – nor that of the centrist and provincial politicians he will need to get his reforms through parliament.
Analysts expect he will have to temper his crash-or-crash-through approach to politics.
He was conciliatory in his victory speech, noting there were “dozens of representatives and senators from other parties with whom we can reach basic agreements”.
“There were tentative signs in Milei’s post-election speech that he is moderating his stance in order to win over moderate lawmakers,” Kimberley Sperrfechter, of Capital Economics, said in a note.
Barclays’ Stambulsky said Milei’s landslide win would give him some leverage over provincial governors, who are represented in parliament. But he could also boost spending on some services and infrastructure to get their support.
What worries analysts is whether, and how, Milei will complete the job of liberalising the peso.
The exchange rate is still too high to unshackle economic growth, but the markets, politicians and voters might not let Milei devalue it too far, too fast.
“A weaker exchange rate is needed for Argentina to grow on a sustained basis and for the central bank to rebuild its foreign exchange reserves. But it’s now looking more likely now that this will happen in an orderly manner,” Sperrfecther said.
“Orderly” is not an adjective commonly associated with Milei. But his victory speech did tone down the usual level of brio: he spoke of “consolidating growth” before “a definitive take-off”.
While Milei has renewed spring in his step, this is perhaps recognition that he still has hard yards ahead.
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