Argentina’s perilous path to economic stability

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Argentina has long been famous for producing unwelcome economic and political shocks. National primary elections on Sunday were no exception. The big winner was Javier Milei, a maverick libertarian economist who favours dollarising the economy, slashing government spending, widening gun ownership and legalising the sale of human organs.

An economics professor turned TV personality, Milei has no executive experience and less than two years in congress. His extreme anti-establishment message echoes that of other far-right populists such as Jair Bolsonaro and Donald Trump. It resonated with Argentine voters angry at persistent government failures. Their country has for decades failed to make the most of its abundant natural wealth and rich human capital.

Milei won 30 per cent of ballots, well above the level suggested by recent polls and enough to secure first place in a vote that has traditionally acted as a dress rehearsal for October’s presidential, congressional and gubernatorial elections. The main centre-right opposition, Juntos por el Cambio (JxC), signally failed to capitalise on the national mood of anger, mustering only 28.3 per cent. The incumbent Peronist movement, which has dominated government since Argentina’s return to democracy in 1983, slumped to third place. Abstentions in what was officially a compulsory vote topped 30 per cent.

The immediate shockwaves from the result forced economy minister Sergio Massa to devalue the wildly distorted official exchange rate by 18 per cent against the dollar and raise interest rates to 118 per cent. Massa, who is running as the Peronist presidential candidate, now faces an uphill struggle to prevent a full-blown economic collapse before the next government takes office in December. His pledge of no further pre-election devaluations lacks credibility after Monday’s panic move and local banks may balk at rolling over the government’s ever-growing mountain of domestic debt. 

The IMF’s board faces an unenviable choice this month: either it approves a further disbursement of $7.5bn to Argentina from a $44bn refinancing programme, despite Buenos Aires’ failure to meet some of the agreed goals, or it withholds the money and risks triggering an economic collapse.

Amid so much gloom, optimism may be hopelessly misplaced. Yet some investors remain bullish about the South American nation’s medium-term prospects. They consider the collapse of the Peronist vote as evidence that Argentines are ready for deep and painful free-market reform. Two-thirds of electors on Sunday chose right or far-right parties who want to trim the bloated welfare state, remove artificial exchange controls, halt central bank money-printing and unshackle business.

Flourishing lithium mining, fast-expanding shale oil and gas production and potent agribusiness exports underpin the case that Argentina’s economic fundamentals are strong. Optimists believe that JxC’s Patricia Bullrich stands a good chance of winning the presidency and even if the maverick Milei were to edge her, he would lack a congressional majority and would have to moderate policy in office.

Yet Argentina’s path to economic stability and prosperity remains narrow and perilous. The risks of a disorderly devaluation, a lapse into hyperinflation or a government bankruptcy before the election are real. The presidential election victor faces the Herculean task of simultaneously restoring confidence in the economy, pushing through painful reforms, winning back investment and building a strong enough national consensus for change to avoid crippling social protests. That would be a tall order for the most skilful and experienced of politicians, let alone for a far-right populist with unorthodox economic views.