What’s Next for Argentina’s Milei After Big Midterm Win? More Austerity Cuts.

Argentina President Javier Milei’s Liberty Advances party breezed past the leftwing opposition Peronists in the midterm legislative election. (Emiliano Lasalvia / AFP / Getty Images)

Key Points

• President Javier Milei’s Liberty Advances party secured 41% of the vote in midterm elections, exceeding investor expectations.
• Argentine sovereign bonds due in 2041 increased 20%, and the peso gained more than 4% against the dollar.
• Liberty Advances and allies will hold 104 of 257 Lower House seats, requiring coalition building for legislative agenda.

Argentine President Javier Milei staved off political extinction in midterm elections on Sunday. Now he faces the merely gargantuan task of propelling his country out of “100 years of decadence,” to quote his own phrase.

Markets went wild after the libertarian crusader outperformed most expectations. Milei’s Liberty Advances party took 41% of the Oct. 26 vote, breezing past the one-third threshold investors informally set for him, and trouncing the leftwing opposition Peronists by 14 percentage points. Argentine sovereign bonds due in 2041 leapt 20% to 65 cents on the dollar. The peso climbed more than 4% against the dollar.

“The exuberance is not irrational,” comments Thierry Larose, portfolio manager for emerging markets local debt at Vontobel Asset Management. “The outcome was a massive surprise.”

Still, he isn’t adding to a position that was already overweight coming into the election. “The market is very volatile, so the size of exposure is very important,” he says.

Milei’s reformist predecessor, Mauricio Macri, also killed it in midterms in October 2017. Six months later, the peso collapsed. Macri ended his term in disgrace, with Argentina owing $40 billion or so to the International Monetary Fund.

Currency management will be job one for Milei too as he seeks to prove this time is different, says Jeff Grills, head of emerging markets debt at Aegon Asset Management. The peso is “probably 10%-20% overvalued,” he estimates.

Milei, with a recent boost from a $20 billion U.S. Treasury swap line, has kept it that way because devaluation could reignite the runaway inflation he has struggled to quell. But an expensive currency hurts exports from and investments into Argentina, feeding the dollar squeeze that made the swap line necessary.

Milei’s government “needs to make an adjustment over the next week or two, maybe a month,” Grills says. Until then, “We feel comfortable with the position we have” in Argentine bonds, he says.

Liberty Advances will be short of congressional majorities despite its strong election performance. The party scarcely existed before Milei’s election in 2023, and only half the Lower House and one third of the Senate were up for re-election this time.

Liberty Advances and its allies from Macri’s old party will control 104 of 257 Lower House seats when Congress convenes Dec. 10, says Graham Stock, senior sovereign strategist at RBC Global Asset Management. That means extensive glad-handing and horse trading before the famously blunt Milei can get started on a daunting legislative agenda.

Congress has to pass its first budget since 2023. Milei has been extending the former budget and slashing expenses by not indexing them for inflation. Past that loom sweeping structural reforms of Argentina’s archaic labor laws, tax and pension systems. “Labor reform is where I would start,” comments Bruno Binetti, a fellow with Chatham House’s Americas Program. “The government would like to increase competitiveness rather than devalue the currency.”

Milei’s post-midterms victory speech kindled hope for less chain saw and more coalition building over the next two years, Stock says. The president cited “dozens of deputies and senators from other parties with whom we can reach basic agreement.”

He invited dialogue with provincial governors who may control the legislative swing votes. “Milei wore a suit instead of a leather jacket and didn’t insult the moderates in Congress,” Stock summarizes. “Early signs are quite positive.”

The avowedly pro-American, and specifically pro-Donald Trump, Milei may also need more geopolitical subtlety going forward. China is more or less equal to the U.S. as an export market for Argentina. Beijing planted investment seeds under the last Peronist government that Milei would do well to nurture, from lithium mines to a space exploration center. “No country in Latin America can turn its back on China,” Stock observes.

Argentina does have attractions to offset its manifold challenges. Production at the Vaca Muerta shale oil field, which is roughly the size of Belgium, climbed 15% over the past year, with 90% still untapped. A rich copper belt in the north of the country has lain fallow since Macri crashed and burned in 2018. An underappreciated tech talent pool gave birth to regional e-commerce giant MercadoLibre among others.

Milei’s trump card, though, may be the time warp that seems to have captured his Peronist nemeses. The party, which nudged toward the center between Macri and Milei, has veered hard left again under ex-president Cristina Kirchner and Buenos Aires Province governor Axel Kicillof. Voters would rather endure Milei’s shock therapy a while longer, apparently.

“Whenever Peronism has resurfaced in the past, it’s been because of a renewal of leadership,” Binetti says.

No sign of that right now. Milei needs to take advantage, quickly.

Write to editors@barrons.com