Argentina: What lessons can be learned from the midterm elections?
|Against all odds, Argentine President Javier Milei’s party emerged victorious in the 26 October midterm elections, despite suffering an electoral setback less than two months earlier. What was behind this turnaround, given that the economic and social situation has deteriorated significantly since the spring? Will the easing of tensions on the peso and the risk premium be enough to avoid a recession? Will US financial support be enough to avert any risk of default on foreign debt?
Against all odds, President Milei's party (La Libertad Avanza, LLA) emerged victorious from the 26 October midterm elections, despite suffering an electoral setback less than two months earlier in the provincial elections in the Buenos Aires region. With LLA's allied parties, President Milei now holds 43% of the seats in the Chamber of Deputies, which should reverse the balance of power that he lost over the summer. This electoral turnaround, against a backdrop of economic deterioration, is due to low voter turnout, reflecting voter fatigue, disinflation and Donald Trump's conditional support. The easing of tensions on the peso and risk premia may prevent the Argentine economy from experiencing a prolonged recession. However, GDP growth will slow significantly. Furthermore, the exchange rate policy poses a risk of a new depreciation of the peso. US financial support has been misinterpreted as a bailout, as the government's solvency is not in question. However, due to limited foreign exchange reserves, support from the US Treasury, which is currently acting as guarantor, is necessary in order to reassure investors about the Argentine government's short-term ability to service its dollar-denominated debt.
Against all odds, President Milei's party (La Libertad Avanza, LLA) emerged victorious from the 26 October midterm elections, despite suffering an electoral setback less than two months earlier in the provincial elections in the Buenos Aires region. With LLA's allied parties, President Milei now holds 43% of the seats in the Chamber of Deputies, which should reverse the balance of power that he lost over the summer. This electoral turnaround, against a backdrop of economic deterioration, is due to low voter turnout, reflecting voter fatigue, disinflation and Donald Trump's conditional support. The easing of tensions on the peso and risk premiums may prevent the Argentine economy from experiencing a prolonged recession. However, GDP growth will slow significantly. Furthermore, the exchange rate policy poses a risk of a new devaluation of the peso. US financial support has been misinterpreted as a bailout, as the government's solvency is not in question. However, due to limited foreign exchange reserves, support from the US Treasury, which is currently acting as guarantor, is necessary in order to reassure investors about the Argentine government's short-term ability to service its dollar-denominated debt.
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