Argentina: Javier Milei wins the Election, Uncertainty Mounts
Javier Milei's surprising victory in Argentina's election, securing 55.7% of votes, raises uncertainties about his governance strategy. Proposals for dollarization may impact the Peso, and a 3.0% fiscal deficit in 2023 poses challenges. Navigating opposition forces in Congress and renegotiating with the IMF mark critical tasks for Milei's administration, highlighting the unpredictable path ahead.
Argentinians have elected Javier Milei to lead the country for the next four years, defying expectations set by most polls. Despite a marginal advantage predicted for either candidate, Milei secured a comfortable victory over Sergio Massa, obtaining 55.7% of the votes, while Massa gathered only 44.3%. Notably, Milei successfully converted the “Juntos por el Cambio” votes, a coalition that had come in third in the initial round of elections. The outcome raises uncertainties about the strategic direction Milei will take in governing Argentina.
Figure 1: Argentina Run-off Results (% of the valid votes)
Source: La Nacion
Milei's proposals for dollarization may lead to a significant devaluation of the Argentine Peso (ARS). The outgoing government, in power until December 9, has allowed the ARS to float, heightening the likelihood of a new round of inflationary shocks in the coming months. However, we anticipate that Milei's administration may ultimately reconsider the feasibility of full dollarization due to Argentina's limited reserves and the size of its economy.
The fiscal landscape poses another challenge, with Argentina projected to register a 3.0% deficit in 2023, well above the IMF-proposed target of 1.9% of the GDP. Milei's government must address this issue and curtail the Central Bank of Argentina's printing activities, a key source of financing for the country. Implementing necessary subsidy reductions will likely face strong opposition, given that Milei's Libertarian Party holds only a minority of seats in Congress, with Peronist forces occupying around 45% of the seats.
Figure 2: Argentina CPI (Y/Y)
Source: INDEC
Navigating the legislative landscape will require negotiations with Juntos por el Cambio, the primary opposition to Peronism. Despite support from the coalition leaders (Mauricio Macri and Patricia Bullrich) in the second round, internal dissent may complicate Milei's efforts, as some members of this coalition were against the support for Milei. Additionally, Milei's administration will need to renegotiate with the IMF, a process expected to be challenging, with a likelihood of tougher conditions being imposed.
Figure 3: Argentine Pesos to US Dollars
Source: Refinitiv
While Milei's victory signifies a new era in Argentine politics, his limited two-year public life, beginning with his election as a Congress Deputy, leaves uncertainty about whether this marks a four-year experiment or the establishment of a lasting political force, akin to the impacts of Bolsonaro and Trump in their respective countries. The future trajectory of Argentine politics under Milei's leadership remains to be seen.