Argentina: Milei’s landslide midterm election win eases liquidity pressures, but long-term challenges remain

Event

In the end of October, contrarily to polling predictions, Javier Milei achieved a landslide victory in the midterm elections, with his party La Libertad Avanza (LLA) winning 41% of the vote over 32% for the opposition alliance. This result marks a strong public endorsement of his macroeconomic reform agenda.

Impact

This clear election victory comes as a relief to panicking financial markets. In the run-up to the midterms, the Argentine peso experienced multiple runs, weekly breaching the upper limit of its managed exchange rate band (see graph 1), triggering a quick decrease in foreign exchange reserves. In September, Milei’s poor performance at the local elections in Buenos Aires had casted doubt about his political momentum amid multiple domestic shocks. To contain market panic, the US took the unusual step to directly purchase Argentine pesos (for around USD 2 billion) and offered an extraordinary bailout programme with a USD 20 billion swap line upon the condition that President Milei secures a (large) electoral win.

Today, President Milei’s strong electoral win appears to have secured the USD 20 billion US swap line, although the specific conditions linked to it remain undisclosed. Moreover, LLA now holds sufficient legislative power to advance fiscal reforms without the opposition being able to overturn key legislation (which it did in the run-up to the midterm elections), safeguarding Argentina’s fiscal surplus and vital IMF programme. However, to implement deeper structural reforms with a long-term impact, Milei will need to build alliances with other political parties, an area where he has historically struggled.

In the short term, pressures on the Argentine currency should ease and foreign exchange reserves remain at an acceptable level (see graph 2). Nonetheless, risks remain elevated. First, Argentina’s government will need to quickly accumulate foreign currency reserves, given more than USD 25 billion of external debt service is due in 2026. Second, the currently managed currency band is overvalued and impedes foreign exchange reserves build-up, yet the Argentine authorities are committed to maintaining it. Furthermore, continuous US backing may hinge on Argentina distancing itself from China – Argentine’s main trade partner and provider of a USD 13 billion swap line, included in the foreign exchange reserves data – amid intensifying geopolitical rivalry, Milei’s political stability (while unrest is likely to increase) and reform credibility. Finally, another run on the peso and a quick decrease in foreign exchange reserves cannot be ruled out in the medium term given the overvalued exchange rate, and particularly in the run-up to the presidential elections of 2027. Argentina’s history of balance of payment crises and the implementation of foreign exchange controls underscore these vulnerabilities.

In this context, the outlook for the short-term political risk (6/7) – which represents the country’s liquidity – and for the medium- to long-term political risk (7/7) is stable.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com