Argentina on the Edge of Reform: Politics, Prices, and the Road to October 26
- Hippolyte Metzger-Otthoffer
- Sep 18
- 16 min read
Updated: Sep 19
Introduction
Argentina’s economic reform drive under President Javier Milei has reached a critical juncture. After nearly two years of aggressive stabilization measures, Milei’s libertarian coalition suffered a bruising electoral defeat in Buenos Aires Province on September 7, 2025, a result widely seen as a referendum on his austerity agenda. This setback comes just weeks before pivotal midterm elections and amid mounting social discontent and political scandal. For a country long mired in volatility, the moment is fraught with uncertainty. Inflation has been tamed from triple-digit highs, the fiscal deficit slashed, and currency controls unwound, yet public patience is wearing thin, and investor confidence has wobbled. Argentina now stands at a crossroads. The choices made in the coming months, whether to stay the course, adjust policies, or risk backsliding, will define its economic trajectory through 2026 - 2027. In the sections that follow, we examine the political fallout of the recent vote, the status of Milei’s stabilization program, the climate of governance and scandal, market reactions to the latest developments, and three forward-looking scenarios for Argentina’s road ahead.
Political Shockwaves and Midterm Implications
The Buenos Aires provincial election delivered a stark political message to President Milei. The opposition Peronist candidate trounced Milei’s La Libertad Avanza party by roughly 13 percentage points (about 47% to 34%), far surpassing expectations. Buenos Aires Province accounts for nearly 40% of Argentina’s electorate, making this result a bellwether for the October 26 midterm congressional elections. Voters in the country’s most populous province, traditionally a Peronist stronghold, recoiled against Milei’s stringent austerity measures, signaling a “backlash” even in areas where his outsider message had initially resonated. The scale of the defeat raises doubts about the government’s ability to secure a working majority in Congress and thus its capacity to pass key legislation. Half the seats in the lower house and a third of the Senate are up for renewal in these midterms, and Congress is currently dominated by opposition parties. If Milei’s coalition fails to make significant gains, the president will remain in a minority position, vulnerable to opposition bills and potential overrides of his vetoes. Indeed, the Buenos Aires vote already suggests a “tough battle” ahead for Milei’s camp to avoid scenarios where opponents can overturn his decrees.
Compounding the electoral setback are a series of political and ethical challenges that have eroded Milei’s standing. In August, a bribery scandal implicating Milei’s inner circle, including his sister and de facto gatekeeper, Karina Milei, broke into the open. Leaked audio recordings and subsequent raids alleged that officials in a disability benefits agency ran a kickback scheme that funneled payments to the president’s sister. Milei swiftly fired the agency head and denied prior knowledge, but the damage was done. The “Karina scandal” dented the administration’s anti-corruption image and sapped political capital just as the government was gearing up for the campaign. It also coincided with legislative turbulence: Milei had controversially vetoed a law to increase pensions and disability stipends, a move he argued was necessary to protect fiscal balance, only to see Congress unite across party lines to override his veto shortly thereafter. The optics of lawmakers reversing the president’s decision on social spending, combined with street protests in Buenos Aires against the austerity push, underscore how limited Milei’s governing mandate has become in recent weeks.
Facing these headwinds, the administration has been forced to rethink its political strategy. Milei struck a defiant tone after the provincial loss, conceding “a clear defeat” but vowing not to retreat “one millimetre” from his free-market reform agenda. Still, advisors acknowledge that some course correction is needed. Senior officials have hinted at a cabinet reshuffle once the new Congress is seated in December, signaling an attempt to reset relations and “see why the macroeconomic results are not reaching the people”. Political analysts note that Milei may have to revive the alliance-building approach of his first year in office: forging pacts with opposition governors and pragmatic Peronists to sustain his program in a more hostile climate. “To restore balance, Milei must do what he did in his first year: stabilize the economy and rebuild the coalition,” argues analyst Andrés Malamud. In practical terms, that could mean tempering the most radical edges of his platform and finding common ground on issues like provincial funding, in order to avoid legislative paralysis. The specter of Buenos Aires’ Axel Kicillof, the victorious Peronist governor now touted as a potential presidential contender for 2027, looms large. While Kicillof’s win may not automatically translate nationwide, it has revitalized the Peronist base and given the opposition a unifying narrative of social justice versus “excessive” austerity. For Milei, the political implications of this moment are clear: without a course adjustment or new alliances, his ambitious reforms risk being stymied by a strengthened and emboldened opposition as Argentina heads into the midterms and beyond.
Macroeconomic Stabilization: Progress and Pressure Points
Despite the political turbulence, Argentina’s macroeconomic stabilization program has, on paper, made notable strides over the past 20 months. Milei swept into office in December 2023 vowing to end Argentina’s cycle of runaway inflation, fiscal profligacy, and currency dysfunction, and early policies have delivered measurable results. Inflation, which was running in triple digits annually before he took power, has been on a firmly downward trajectory. Tight monetary and fiscal discipline, essentially a shock therapy of high interest rates and deep cuts to subsidies, broke the back of hyperinflationary expectations.
By mid-2025, annual consumer price inflation had fallen to the 30s percent (year-on-year), less than one-third of its level a year prior. Both headline inflation and inflation expectations are, according to the IMF, “firmly on a downward path”, indicating a tentative restoration of price stability after years of chronic price spirals. This disinflation has been achieved in part by pegging public sector wages and utility prices to more moderate increases and by restraining the growth of the money supply.
Notably, INDEC (Argentina’s National Institute of Statistics and Censuses, which compiles the country’s official CPI, GDP, labor, poverty, trade, and census data) plans to release an updated consumer price index methodology later this year to better capture current consumption patterns, a technical change intended to bolster the credibility of inflation data amid criticism of the old index’s accuracy. On the fiscal front, Milei’s government has pursued an almost unprecedented consolidation. In the span of a year, Argentina shifted from a large primary deficit (roughly 5% of GDP in 2023) to a near-balanced budget position. The administration’s policy anchor is a “zero-overall deficit” target, meaning that including debt service, the government aims to spend only as much as it earns, a sharp departure from Argentina’s long history of deficit monetization. For 2025, the authorities have committed to a primary fiscal surplus of about 1.6% of GDP, comfortably exceeding initial IMF program requirements. Spending cuts have been broad and often contentious: energy subsidies are being pared down with electricity and gas tariffs rising to reflect true costs, public payrolls have been frozen or trimmed, and previously untouchable social programs are being tightened. According to the IMF’s first review, “continued spending discipline remains essential, and will involve the administration resisting new unfunded spending initiatives,” stance evidence in Milei’s veto of bonus pension payments and other opposition-led spending bills. At the same time, revenue has been bolstered by an improving tax take (helped by better compliance and one-off asset sales), such that Argentina actually recorded a small fiscal surplus in the first half of 2025. The pace of fiscal adjustment has been painful, contributing to an economic contraction of about 3-4% last year and pushing poverty above 50% at one point, but it has also impressed international observers with its rigor. IMF Managing Director Kristalina Georgieva lauded the “remarkable fiscal consolidation” and stressed that the deficit-zero goal remains the linchpin for sustaining investor confidence. Indeed, credible fiscal tightening has underpinned a broader stabilization of the economy, helping to reduce the need for central bank money-printing and thus reinforcing disinflation.
A cornerstone of Milei’s strategy has been overhauling Argentina’s dysfunctional foreign exchange regime. Upon taking office, his team moved swiftly to unwind the thicket of currency controls and multiple exchange rates that had distorted the economy. In April 2025, in coordination with the new IMF program, Argentina shifted to a managed float: the peso now trades within a moving band that started at 1,075 pesos per US dollar, with the band edges crawling outward by 1% per month. This marked a clean break from the previous tightly controlled “crawling peg” and effectively unified the official and parallel exchange rates, eliminating most of the gap that had fueled arbitrage and capital flight. Initially, the transition to a more flexible rate was surprisingly smooth, as the peso stayed near the middle of the band and the feared inflationary burst from devaluation did not materialize in a lasting way. By mid-2025 the parallel “blue dollar” market had virtually converged with the official rate, reflecting renewed confidence that the currency was no longer wildly overvalued.
The central bank gained newfound credibility by sticking to its rule of intervening only at the band limits and otherwise letting the peso find market levels. However, as 2025 wore on, pressure on the currency resurfaced. A combination of factors, including strong domestic demand that pulled in imports, a loosening of import restrictions, and political jitters, led the peso to weaken toward the upper end of the band. In early September, after the Buenos Aires vote, the peso briefly hit historic lows (trading around ARS 1,400+ per dollar) until central bank intervention provided some support. This put the authorities in a bind: either allow a steeper depreciation ahead of the elections, which could reignite inflation, or intervene heavily by selling dollars, which could drain already scant reserves. As Pimco’s Pramol Dhawan warned, “opting for intervention would likely prove counterproductive, as it risks derailing the IMF program and diminishing prospects for future market access”. In other words, burning through reserves to defend the peso could undermine confidence more than a controlled devaluation would. So far, Economy Minister Luis Caputo has insisted the FX regime will “not change”, sticking with the crawling band and selective intervention strategy. But markets are keenly watching whether mounting exchange-rate pressure forces a policy shift, a test that will intensify if political uncertainty persists. Argentina’s foreign reserves are another critical pressure point. The central bank’s net international reserves (NIR) have been hovering around zero or negative territory even after two IMF disbursements this year. Rebuilding the reserve stockpile has proven slower than hoped. A target to boost NIR by $4 billion in 2025 is already facing shortfalls, leading the IMF in August to formally loosen the reserve accumulation goals and push some program reviews until after the elections. As of late August, the IMF had disbursed about $15 billion of a new $20 billion Extended Fund Facility for Argentina. Those funds, along with loans from other multilaterals and a Chinese swap line extension, have been used in part to pay down internal debts (e.g. repurchasing peso-denominated bonds from the central bank) and to intervene modestly in FX markets. Nonetheless, net reserves remain weak, roughly -$7 billion by the IMF’s own estimate after a bout of capital outflows. The Fund agreed to “lower the bar” on reserve targets through 2026, recognizing that initial build-up efforts were falling short. This flexibility buys Argentina some breathing room, but it also highlights a lingering vulnerability: without a solid reserve buffer, the country is one external shock away from renewed balance-of-payments stress. The IMF has cautioned that “more work is needed to durably strengthen the external position”. In practice, that means Argentina must generate trade surpluses, attract investment, or sell assets to bring in hard currency. The Milei administration has pursued all of the above, from promoting a mining and energy export boom to announcing plans to privatize state companies, including the Buenos Aires water utility, to raise dollar proceeds. These efforts, alongside the easing of capital controls, are geared toward one ultimate goal: normalizing Argentina’s access to global capital markets. Indeed, Argentina surprised observers by successfully re-entering international bond markets earlier in 2025, issuing a small dollar bond well ahead of schedule. Continued “decisive implementation” of the IMF-backed program could, by 2026, lower sovereign risk enough for Argentina to borrow externally at sustainable rates. However, that optimistic outcome hinges on maintaining policy discipline and political stability. Any slippage on fiscal targets, resurgence of inflation, or investor fear of policy reversal would quickly close the market window and put Argentina back on the defensive. In short, the stabilization program has achieved notable gains, with inflation down, the deficit curtailed, and the currency unified, but it remains under strain.
The coming midterm elections and their aftermath will test whether these gains can be consolidated or whether new storms will force Argentina off its delicate path.
Markets and Reforms: Investor Sentiment and the Reform Agenda
Financial markets were quick to register their verdict on Argentina’s latest political shock. On Monday, September 8, as the Buenos Aires provincial result hit the tapes, the peso lost as much as 5.6% intraday before closing 3.1% weaker around ARS 1,407 per dollar and the S&P Merval fell about 13% on the day. Prices of dollar bonds dropped by around five to six cents, marking their steepest one-day fall since those securities began trading after the 2020 restructuring. By the end of the week, Friday, September 12, the equity benchmark had logged its worst weekly performance since early 2024, down nearly 12% for the period, while sovereign bonds hovered near post-vote lows.
In essence, investors panicked at the prospect that Milei’s “radical agenda” might be stalling. The Buenos Aires upset rattled what had been, until recently, one of the emerging world’s best-performing markets. It signaled a collective realization that Argentina’s political risks were, in fact, alive and well. As Kathryn Exum, co-head of sovereign research at Gramercy, told Reuters on September 8, 2025, the vote was a reminder that Peronism, with its interventionist economic instincts, is “not yet dead” and could mount a comeback. The market turbulence also reflected fears that a weakened Milei would struggle to execute the tough policies needed to keep Argentina on a reformist, investor-friendly path. International funds that had bet on an Argentine turnaround began reassessing their exposure; for instance, Morgan Stanley abruptly withdrew its short-lived “like” recommendation on Argentina’s bonds right after the vote, having warned that a Milei drubbing could knock bond prices down dramatically. In short, the qualitative message from markets was clear: confidence in Argentina’s story hinges on the government’s political clout to continue reforms. Any indication that reform momentum is in jeopardy, whether from an electoral rebuke, a policy U-turn, or governance concerns, is met with swift selloffs. Conversely, investors are still hungry for upside if Argentina stays the course; even after the recent slump, Argentina’s bond prices remain above distressed lows, reflecting a cautiously optimistic bet that Milei’s program (backed by the IMF) will muddle through. The coming weeks may bring high volatility but also differentiation, as markets parse signals such as midterm campaign rhetoric or talks of deals with opposition factions to judge whether Argentina’s reform trajectory remains intact or needs a full repricing.
At the core of investor concerns is the fate of Milei’s ambitious reform agenda, encompassing both what has been achieved and what remains pending. In less than two years, the administration has implemented what is arguably the boldest economic liberalization in Argentina since the 1990s. The list of completed reforms is long and significant. To stabilize prices, the central bank under Milei has upheld orthodox monetary policy, halting direct financing of the Treasury and maintaining positive real interest rates. To restore fiscal health, spending has been slashed across the board and taxes kept broadly steady (with an eye to possible future tax cuts once revenues allow). To free the economy, myriad interventionist regulations have been rolled back: price controls on fuel and basic goods were lifted, currency exchange restrictions loosened or scrapped, and import/export quotas eased to encourage trade. Perhaps most dramatically, Argentina’s exchange-rate system was liberalized from a fixed crawl to a quasi-free float within a widening band. This effectively unified the official and unofficial exchange rates, a reform that many previous governments had delayed for fear of inflation, yet Milei managed it relatively smoothly, helped by initial market goodwill. In addition, pro-market deregulation moves have targeted sectors such as energy (removing capital controls that hindered oil companies), labor markets (making it somewhat easier to hire and fire in the formal sector), and the business climate (eliminating some export taxes and simplifying red tape for investors). Such measures earned Argentina plaudits in investor circles and were integral to the IMF’s endorsement of Milei’s program. As the Peterson Institute noted, “Argentina has implemented the most ambitious liberalization and deregulation program of this century,” a startling turnaround for a nation recently known for interventionism. These steps, taken together, sought to lay the groundwork for sustained growth and investment after an initial stabilization period.
Yet the reform agenda is far from complete. Several keystone policies remain pending or in progress, and their ultimate fate will determine whether Argentina’s transformation is lasting. One major unfinished item is pension reform. The government has committed to introduce a comprehensive pension overhaul by end-2026, aiming to improve long-term fiscal sustainability in a system burdened by early retirements and generous indexing. Details are still sparse, but the plan likely involves raising retirement ages and tightening special pension privileges, politically sensitive moves that will test the administration’s resolve, especially after Milei’s veto of a pension increase proved unpopular. Similarly, the social welfare system is under the microscope: Milei’s team is working to trim the rolls of certain cash transfer programs such as the AUH universal child allowance by enforcing stricter eligibility and consolidating databases. This effort to better target social aid, reducing fraud and duplication, could save significant funds, but it also risks backlash if it is perceived as cutting support for vulnerable households. Another arena is energy sector reform: plans are underway to fully eliminate energy subsidies by bringing consumer tariffs to cost-recovery levels and possibly privatizing some state energy firms. The recent decision to privatize the big Buenos Aires water utility (AySA) indicates a willingness to divest state assets to raise dollars and improve efficiency.
Perhaps the most controversial reform topic is Argentina’s currency regime, specifically the lingering debate around FX liberalization versus dollarization. Milei rose to prominence by championing a radical idea: abolishing the Argentine peso altogether and dollarizing the economy to permanently end inflation. Upon taking office, however, his government pursued a more gradual path in coordination with the IMF. Rather than immediate dollarization, they chose to ease most FX restrictions and establish a crawling band toward an eventual free float. The IMF program explicitly envisions an evolution to a fully flexible exchange rate in the context of a bi-monetary system, where the peso and U.S. dollar coexist. In practice, Argentina today is already bi-monetary, since many contracts and savings are in U.S. dollars, but the peso remains legal tender for taxes and local transactions. Discussions continue behind the scenes about formal dollarization, but there is recognition that without ample reserves (to back the monetary base) and without further fiscal tightening, dollarization could be dangerously premature. Economy Minister Caputo and the IMF have both signaled that dollarization is not on the near-term agenda; instead the focus is on making the current exchange-band regime work and building confidence in the peso. Still, the idea hasn’t disappeared. Milei’s more ardent supporters see dollarization as the endgame once inflation is low enough. Any hint of a pivot back to that plan, or conversely any reinstatement of currency controls if things go awry, would have major market repercussions. For now, the reform agenda on FX is about staying the course: maintaining the unified market, continuing to relax capital account limitations, and eventually allowing a true free float when conditions permit.
Beyond economics, Milei’s reforms also target governance improvements. Strengthening institutions, from tax collection to statistical agencies, is part of the program. For example, as noted, INDEC is overhauling how it measures inflation to improve data quality. The government is also leveraging technology to cut red tape and corruption opportunities (e.g., digitizing procurement and public service transactions). However, the recent corruption scandal involving Milei’s circle has undercut the reformist narrative on governance. Cleaning up and professionalizing the public sector remains a work in progress, one that requires not just policy decrees but cultural change. This underscores a broader point: investor confidence in Argentina’s reforms depends not only on the policies themselves, but on the credibility of the government to implement them cleanly and consistently. The scandals and political noise of late have given some investors pause, wondering if the reform drive might lose steam or fall victim to old habits. The administration’s challenge is to reassure both markets and the Argentine public that the reform agenda, whether fiscal, monetary, or institutional, is still on track and capable of delivering tangible improvements in living standards. As Milei himself asserted after the recent setback, “we will deepen and accelerate” the changes. The coming months will reveal whether this is politically feasible or if adjustment to the agenda is inevitable.
Conclusion
Argentina has made undeniable progress in a short span: inflation has decelerated materially from prior peaks, the fiscal stance has shifted toward balance, and a cleaner, more coherent FX framework has replaced the patchwork of controls that long distorted prices and incentives. Those gains have begun to show up in expectations, in a modest normalization of domestic funding channels, and in the tentative reopening of market access. Yet the Buenos Aires result underscores how fragile this stabilization still is. Politics now constrains policy bandwidth: a weaker mandate raises execution risk just as the reform agenda enters its most delicate phase—pension parameters, subsidy rationalization, provincial transfers, and further FX liberalization. Governance noise and recent scandals compound that constraint by eroding the credibility premium the program needs.
Markets delivered a clear, qualitative verdict after the vote: without sustained political backing and consistent communication, the cost of capital rises, the currency comes under pressure, and the room to rebuild reserves narrows. That is not a judgment on ideology so much as on delivery. To carry stabilization across a narrower bridge, the authorities will need to sequence reforms with greater care, protect the core fiscal anchor, preserve monetary orthodoxy, and avoid ad-hoc FX interventions that trade short-term calm for longer-term vulnerability. Just as importantly, they must translate macro wins into tangible improvements in real incomes and employment to rebuild social consent for the adjustment.
The next stretch is therefore about consolidation, not reinvention. Success will be measured less by new announcements than by operational steadiness: monthly inflation prints that keep trending lower, a stable exchange regime with shrinking parallel gaps, gradual reserve accumulation, credible budget execution, and IMF reviews that stay broadly on track. If those signposts align, Argentina can defend the hard-won gains of the past two years and reopen a path to durable growth. If they don’t, the country risks slipping back into the familiar pattern where political turbulence overwhelms economic design. The choice is not binary but cumulative, a day-by-day proof that the state can execute, communicate, and adapt without abandoning its anchors. In that sense, the weeks to and through October are less a reckoning than a test of stamina: whether Argentina can keep walking the narrow ridge between stability and slippage long enough for households, firms, and investors to believe that this time is different.
References
Campos, R., & Strohecker, K. (2025, September 8). Argentine markets plunge after Milei’s party loses to Peronists in Buenos Aires vote. Reuters.
Cotterill, J., & Nugent, C. (2025, September 8). Argentine markets slump after Milei loses badly in Buenos Aires. Financial Times.
International Monetary Fund. (2025, August 1). Argentina: First Review Under the Extended Arrangement Under the Extended Fund Facility… Staff Report; Press Release; and Statement by the Executive Director for Argentina (IMF Country Report No. 2025/219). https://doi.org/10.5089/9798229019224.002
Misculin, N. (2025, September 8). Argentina’s Milei must look to alliances after electoral defeat. Reuters.
Miller, L. (2025, August 23). Argentine authorities probe Milei official over bribery accusations—media report. Reuters.
Reuters Staff. (2025, August 25). Argentina’s financial markets tumble amid government corruption allegations. Reuters.
Werner, A. (2025, January 27). Milei in 2025: Between Argentina’s mid-term elections and the IMF. Peterson Institute for International Economics (PIIE).
Otaola, J. (2025, April 14). Explainer: What do we know about Argentina’s IMF deal and FX policy? Reuters.
Reuters Staff. (2025, April 12). IMF approves $20 billion extended fund facility arrangement for Argentina. Reuters.
Campos, R. (2025, August 1). IMF lowers bar for Argentina reserves accumulation, next review due after local October elections. Reuters.
Buenos Aires Herald. (2025, August 5). IMF staff report: Argentina commits to more ‘chainsaw’ policies and a new way to measure inflation.
Financial Times. (2025, August 4). Milei struggles to unlock global capital markets for Argentina. https://www.ft.com/content/3805d265-752a-4f8a-b25c-dde34d8b3eb0
Associated Press. (2025, September 8). Argentina’s Milei suffers sweeping setback in Buenos Aires provincial vote. AP News.
-
Written by Hippolyte Metzger-Otthoffer
Comments