Milei comes out swinging as setbacks pile up before key vote

President Javier Milei suffered rapid-fire political, economic and financial setbacks this week that he’ll need to spin to his advantage as his most daunting electoral test yet draws near.

Opposition lawmakers threatened the primary budget surplus the President touts as his crowning achievement by rejecting Milei’s vetoes on multiple spending bills Wednesday. Fresh data showed economic activity contracting for a second straight month. And a liquidity squeeze sent interest rates soaring to record highs as the government worked to prop up the peso.

The self-described "anarcho capitalist," however, didn’t flinch. Instead, he quickly blamed the Argentine political establishment that has been his punching bag since his successful outsider campaign for president in 2023.

“Yesterday we witnessed a macabre spectacle in Congress,” the president told a business conference in Buenos Aires on Thursday. “They reminded us they have a single legislative agenda: to bankrupt the state.”

The setbacks raise the stakes for two crucial elections. Milei has to convince residents Buenos Aires Province, who make up nearly 40 percent of the country’s population and have consistently voted for his Peronist rivals, that his harsh austerity is necessary. The local vote there next month will be a key signal to investors of what’s to come in October, when all of Argentina heads to the polls to renew a large chunk of Congress.

“We’re evenly matched in this fight,” Milei said of the provincial election. “If we beat them in September, we would be putting the last nail in the coffin of Kirchnerism,” he declared, referring to the dominant leftist wing of the Peronist movement headed by former president Crisitina Fernández de Kirchner.

Despite Milei’s bluster, investors are starting to take notice. “The combination of pre-election political uncertainty, including a rarefied climate in Congress and sharp changes to monetary policy, are proving to be breeding ground for volatility of financial assets,” said Fernando Losada, an economist at Oppenheimer in New York.

While lawmakers in the lower house were able notch partial victories on financial aid for the disabled and provincial transfers, Milei breathed a sigh of relief late Wednesday when the opposition fell just short of the two-thirds majority it needed to overturn his veto rejecting an increase in pensions. Argentina’s dollar bonds dropped by more than a cent across the curve after the disability vote, only to recover earlier in Thursday’s session. But they flipped back to negative as investors digested the political implications.

Although the government managed to keep the veto on the more expensive pension bill, higher spending on disability programs will make it harder to reach Milei’s “ambitious” target of a 1.6 percent primary surplus, said Matías Montes, head of strategy at EMFI Securities. That prospect is weighing on market sentiment, he added.

StoneX strategists led by Ramiro Blazquez agreed, saying in a report to investors that the government’s “limited political dexterity continues to fuel uncertainty” ahead of the September 7 provincial vote.

Economy Minister Luis Caputo, speaking earlier at the same conference as the president, remained defiant. “The flipside of what the world sees as a miracle is what the opposition perceives as being increasingly distant from power,” he said. He described the congressional votes as “short-term obstacles” that do nothing to “change the medium- and long-term outlook.”

Higher rates

Financially, the government is racing to mop pesos after disappointing local debt auctions. Borrowing costs have spiked as a result, with the rate on term deposits shooting past 75 percent, more than double annual inflation.

That’s fuelled tension between Milei’s government and Argentina’s banks, an industry that was largely aligned with his policy goals until its profitability came under threat. Statutory reserve requirements for financial institutions have been raised multiple times in a push to contain the amount of pesos flocking to dollars, and thus hold back inflation. The head of the Central Bank met with executives at leading commercial lenders this week to discuss the issue.

While Milei can tout ample victories on the inflation front — annual consumer price gains have fallen to 37 percent from a peak 300 percent when he took office — the broader economy has yet to take off. Foreign investment, meanwhile, has yet to flood in despite the president’s move to undo many of Argentina’s cumbersome currency controls as part of its latest International Monetary Fund aid package.

“Monetary volatility endangers credit, and that directly undermines the recovery” while stoking political uncertainty, said Javier Timerman, managing partner at Adcap Grupo Financiero in Buenos Aires. “In this context, it is natural for investors to seek liquidity at all costs.”