Javier Milei, a self-described “anarcho-capitalist,” campaigned for the presidency on a platform that featured pledges to slash state spending, shrink the government, dismantle regulatory constraints on the private sector, and wage war against a corrupt political “caste” that had mismanaged Argentina into a seemingly endless series of economic crises.

He won a run-off contest against Sergio Massa, the economy minister in the incumbent left-leading administration, with 55% of the vote, a clear mandate from a frustrated and disgusted elec­torate to proceed with his program of radical reform.

Lacking majority support in either chamber of the Congress, the new administration took im­mediate bold action to repair an economy hobbled by triple-digit inflation, depleted foreign currency reserves, and a crushing debt burden, administering a dose of economic “shock therapy” that included a large devaluation of the peso and a combination of spending cuts and tax increases aimed at closing a budget shortfall amounting to more than 5% of GDP by the end of 2024. Milei’s attempt to implement his sweeping reforms by decree has run into resistance from the courts and a separate omnibus reform bill presented to the Congress failed to secure passage in the lower house.

The president is front-loading the expenditure of his political capi­tal and wagering that resistance to deeper restructuring will dissipate once the beneficial effects of his re­forms become apparent. Disparaging the pursuit of consensus as a recipe for corruption, Milei has suggested that he will sit on the omnibus re­forms until late 2025, following the mid-term congressional elections, at which point the administration might be in a stronger position to push forward its agenda. The presi­dent further indicated that he will otherwise accomplish what is pos­sible by executive decree.

The playing field could shift in the president’s favor before then if the moves made to date bear fruit. There have already been some positive signs, but the budget and inflation numbers are more likely to cheer investors than reassure voters, for whom the immediate effect of the government’s shock therapy is larger utility and transportation bills, less disposable income, and a significant erosion of peso-denominated sav­ings. The doubling of the universal child allowance plan and a 50% in­crease in benefits under a food card program will provide some measure of relief for vulnerable families, but the government could face a rising tide of discontent if clear signs of a turnaround fail to materialize by the second half of the year.

The president’s openly combat­ive posture risks provoking moves by the congressional opposition to take a stab at overturning the so-called “mega-decree,” which would require rejection of the measures by a majority in both chambers. Even if the decree measures survived, the attempt alone would add to uncertainty and lead to deepening polarization, increasing the risk of public unrest that would reinforce the inclination of congressional par­ties to distance themselves from the administration’s program, rendering the Milei administration impotent and ruling out any chance of mid-term legislative gains that enhance the president’s room for maneuver.

Retaining the confidence of the IMF will be crucial to Milei’s chanc­es of avoiding that scenario. Both the government’s strategy to date and the IMF’s reported conditions for a revised lending agreement highlight the centrality of containing infla­tion, even at the cost of potentially severe short-term economic pain, to putting the economy on the path to recovery and long-term stability. In a best-case scenario, the anchor­ing of inflation expectations would facilitate the rapid deceleration of inflation into low double digits by the middle of 2024, clearing the way for the lifting of capital controls and forward movement on a broader stabilization program.

However, if inflation persists at a high level, the government will face pressure to make additional exchange-rate adjustments that pro­long the economic pain, increasing the risk that what the hardships the government has characterized as a temporary sacrifice will begin to feel like a prolonged punishment. Disappointed hopes of a rapid im­provement would increase the risk of social unrest, political instability, and a policy retreat that leads to a rupture in relations with the IMF.

The analysis above is taken from the February 2024 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.