Is Javier Milei Failing?

In an effort to stabilize markets in Argentina, the U.S. purchased Argentine pesos and finalized a $20 billion currency swap, Treasury Secretary Scott Bessent announced in an October 9th post on X. Bessent also says Argentine President Javier Milei will visit President Trump on October 14th. 

Milei recently suffered a heavy defeat in elections held in the province of Buenos Aires, where almost 40 percent of the country’s electorate lives. Those were elections for provincial legislators and city councils, but Milei, who had come within 1.5 percent of winning there in the 2023 presidential election, turned it into a national contest. That worked out badly: his coalition placed almost 14 points behind that of the leftist Peronist, who is the governor of the Buenos Aires province.

Some of Milei’s successes have been amply touted in the international press. He eliminated the fiscal deficit, which amounted to 5 percent of GDP, with drastic spending cuts that have affected large groups of voters. He reduced inflation from 200 percent in the year he took power to less than 30 percent this year. Moreover, thanks to Federico Sturzenegger, his best minister, Milei managed to deregulate some sectors of the economy. 

But since he does not command a majority in Congress and has adopted a vulgar confrontational style, his previously tame legislative enemies are beginning to fight his agenda. His government has also encountered a backlash due to corruption and astronomical interest rates, which make credit and investment scarce. If he does not win a massive victory in the mid-term elections in late October, the possibility of further reforms and tangible results beyond the mitigated inflation will almost disappear.

What reforms? Everything from labor reform (hiring and firing workers is a nightmare in Argentina, where labor is taxed even higher than in Europe) to pension reform (private pensions were taken over by Cristina Kirchner’s government in 2008) to tax reform (according to the Argentine Institute of Fiscal Analysis, Argentines pay some 155 different types of taxes and levies). Such reforms must go through Congress, which means Milei will be political toast if he does not win an outsized victory. Without these reforms, investment, sustained economic growth, and job creation will become a pipe dream. In the second quarter of this year, the economy shrank 0.1 percent compared to the first quarter.

More immediate problems have begun to surface. They all have to do with trust. In a country where people at all levels obsess daily over the exchange rate, the Treasury is offering astronomically high interest rates to roll over various types of debt, hoping to prevent a devaluation of the peso. The Treasury is also selling dollars every day (and not informing the public of how many). Further, the central bank, which Milei had announced would disappear, keeps raising the banks’ reserve ratio to limit the amount of currency in circulation, which would inevitably be used to buy dollars. 

The central bank is also intervening in the futures market to contain the exchange rate and is selling dollars, as we saw a few days ago when the currency hit the bottom of the foreign exchange band agreed with the International Monetary Fund a few months ago.

The corruption scandals, which are small compared to those of the Kirchner period, are sapping the government’s credibility. Milei’s many enemies have begun to smell blood: not precisely an atmosphere conducive to regaining the trust of national and foreign investors or the wider international community.

It is too early to dismiss Milei’s chances of regaining the momentum he had a few months ago, when his agenda seemed unstoppable and he looked like he was on top of the world. But the unexpected thrashing he got in the Buenos Aires province indicates that a significant number of voters are losing patience; that is the worst thing that can happen when his efforts need time to bear fruit, when tough new reforms lie ahead, and when he needs a wide base of support to continue to confront the vested interests that are regaining strength.