Argentina is going through an unprecedented economic experiment. Almost two years after taking office, President Javier Milei has promoted a drastic adjustment to stabilize an economy marked by chronic inflation, fiscal deficit and distrust in the peso. The initial results have been positive. More recently, however, the government's popularity has suffered and markets have shown signs of "political panic", prompting the United States, Argentina's main geopolitical ally, to express its full support for the government's plan through U.S. Treasury Secretary Scott Bessent and President Donald Trump.

Javier Milei took office with a diagnosis shared by most economists: the country could not continue sustaining the inflation that had been dragging on, nor could it continue to finance itself with unlimited issuance. In addition, there was a distorted exchange market, with multiple exchange rates and a huge gap between the official and the parallel dollar.

In addition, Argentina's credit quality was still conditioned by the lack of access to international markets, which required continuous negotiation with multilateral organizations. Poverty and institutional deterioration completed an urgent situation that required quick, albeit unpopular, measures.

The government responded with a two-pronged strategy: "chainsaw" and "blender". The first one aimed at cutting government spending, while the second one consisted of liquefying public spending through inflation. The result was a fiscal surplus, something that had not been achieved for years. And inflation, although still at double-digit levels, showed a slowdown compared to previous years (33.6% in August vs. a peak of 289.4% in April 2024).

A central challenge is the social level. The adjustment has deepened the recession: economic activity fell, consumption plummeted and poverty increased. At the same time, a complex institutional front persists: Milei lacks the legislative majority to pass structural reforms and the country continues to show weak institutions, a key factor to sustain growth and confidence in the long term.

Presidential popularity, which was a key asset in his first months to take necessary but unpopular measures, shows signs of deterioration, with 53.7% of Argentines disapproving of Milei according to LatAm Pulse, increasing for the third consecutive month.

This erosion has already begun to be reflected at the polls. On September 7, the provincial elections were held, in which the opposition won in the province of Buenos Aires, the most populated province of the country, generating a political blow to the government. In addition, the results of these elections are used as a thermometer for the legislative elections at the end of October, where the Chamber of Deputies and the Senate will be partially renewed. However, polls still show a favorable result for Milei for those elections.

Market reactions were not long in coming, with the Merval stock index declining, bond rates rising, and selling of the Argentine currency. The latter has been the most relevant, because the government's exchange rate policy is to maintain a floating exchange rate with bands, so the Central Bank is using its few reserves to keep the peso within the range agreed with the IMF in the framework of a loan received at the beginning of this year.

However, in the midst of these difficulties, Donald Trump and Scott Bessent fully supported Milei's government, pledging to help Argentina to avoid repeating the history of economic failures. With this, Argentina could avoid a depreciation of its currency that would jeopardize inflation control and Milei's economic plan.

The Argentine economy continues to walk a fine line. An episode of financial panic, with massive capital outflows or a new currency run, could erase all recent progress. Likewise, social discontent and recession fatigue could generate political tensions that could block the reform program.

Milei has achieved in a short time what seemed impossible: containing runaway inflation and drastically reducing the fiscal deficit. However, the social and political cost is high, and the road to a lasting recovery is far from assured. International support provides some respite, but the real test will be whether Argentine society can resist long enough for the fruits of stabilization to be transformed into sustainable growth.

Vicente Dourthé
Portfolio Manager Private Debt Fynsa AGF