BUENOS AIRES—The future of Argentina’s free-market experiment hinges on its midterm congressional elections Sunday.
Rarely are Washington and Wall Street watching a local foreign election this closely, but rarely has so much been riding on the outcome, including a $40 billion US rescue plan.
If President Javier Milei’s Freedom Advances party effectively loses the election, the brash libertarian leader’s radical overhaul of Argentina’s economy will come crashing to a halt. If Milei’s party scratches out a narrow win, he will have a fighting chance to carry out phase two of his remake of Argentina.
Why Milei’s party is in danger of losing
So far, Milei has shrunk the country’s bloated government bureaucracy and ruthlessly cut public spending, which has caused painful job losses but also tamed runaway inflation.
The election is on a knife-edge after Milei’s party was trounced in a Buenos Aires provincial election in September. The result showed how unpopular some of his economic changes have been and how badly Milei’s blunt, sometimes insulting style had alienated his allies and the public.
“Most of the things that could go wrong for Milei before the election, went wrong,” said Signum Global Advisors, a political-risk firm, in a note to clients.
Political analysts largely agree that the best barometer of Sunday’s result will be his party’s total share of the national vote across the country, though how many total seats it wins will be important too.
Less than 35%: dangerous ground
Winning anything short of 35% puts Milei and his market revolution on dangerous ground. To have a chance of getting enough seats in Congress to see through his plans, Milei needs more than that, with a result above 40% signaling a clear win.
Milei’s party needs to come out of Sunday’s election with close to a third of the 257 seats in the lower house, the Chamber of Deputies, and ideally also a third of the 72 Senate seats. Anything less, and the opposition could override Milei’s vetoes and block his often-used presidential decrees, effectively making him a lame duck.
Milei has received a taste of that scenario in recent weeks. Lawmakers overturned a Milei veto for the first time in September and two vetoes this month, reinstating bills that increased public spending. At worst, Milei could face impeachment, which requires a two-thirds majority in both chambers of Congress.
A poor result would likely trigger a selloff in the peso and Argentine stocks and bonds as investors reassess Milei’s ability to deliver on fiscal change. In turn, inflation would likely rise, and the central bank would likely raise its interest rate, which it set at 29% in January. A deep recession could follow.
“Anything below 30% of the vote would be a huge failure for Milei,” said Mauricio Monge , senior Latin America economist at Oxford Economics. “Even if he increases his party’s share of Congress from what he has now, it’s not enough to give investors confidence.”
President Trump has signaled he wouldn’t go forward with a $40 billion rescue plan for Argentina.
“If he wins, we’re staying with him. And if he doesn’t win, we’re gone,” Trump said this month.
Argentina could also struggle to secure future financing under a Congress controlled by Milei’s opponents. The country is by far the largest borrower from the International Monetary Fund, with more than $50 billion in debt.
More than 35%: a fighting chance
Under this scenario, Milei could veto hostile legislation and prevent his decrees from being overturned. He would still depend on alliances to govern.
Investors will be watching the performance of the Peronists, a left-wing movement descended from the Argentine strongman Juan Perón . It has long dominated the country’s politics.
“If Milei gets a third of the vote, but the Peronists get 38% or 39%, the market will still be concerned,” said Alberto Ramos , head of Latin America economics research for Goldman Sachs.
If Milei gets 40% or more of the vote, Argentina’s assets are likely to rally, with stocks potentially gaining more than 10% in Monday’s trading. If the result is closer to 35%, investors might look at the strength of the Peronist vote before piling into the country’s markets.
Write to Samantha Pearson at samantha.pearson@wsj.com
