Argentina heads into its midterm legislative elections this Sunday with President Javier Milei’s economic program facing one of its most complex political and market challenges since he took office in December 2023. Despite praise for Milei in bringing inflation down, voters are concerned about a stalling economy, and markets are increasingly questioning the country’s current foreign exchange regime. At the same time, the United States has stepped in with a major swap line to provide liquidity to Argentina’s cash-strapped central bank.
At stake on Sunday is the government’s objective of securing at least one-third of the seats in both chambers of Congress, which would give the administration the ability to block veto-proof legislation on areas such as spending that could derail its economic plan. Given this complex environment, it’s worth a closer look at the state of Argentina’s economy in the run-up to the vote.
Assessing Argentina’s recovery
As I explained in an article I co-wrote in August, Argentina is emerging from a decade-long period of slow growth, during which the country experienced rampant inflation, capital flight, and a chronic inability to build its foreign exchange reserves. In December 2023, Milei came into office promising to steer the country away from that course. He began by slashing public spending, ending inflationary money creation, liberalizing the economy, and, most importantly for the current context, intervening in the country’s exchange rate.
The results were positive: The economy started to recover after an initial decline, investment began to move back in, and inflation fell from an annualized peak of almost 300 percent year-over-year in March 2024 to the current projection of 30 percent for 2025. Nevertheless, Argentina is confronting the side effects of its version of an “exchange rate-based stabilization program” with the resulting drag on growth.
These programs, in which a country props up its exchange rate as an anchor to curb inflation through foreign-exchange stability, tend to distort the economy by, for example, making exports more expensive and imports more affordable, harming the competitiveness of key sectors. Interest rates also tend to rise in these programs as governments offer higher returns on domestic-currency financial instruments to prevent selloffs. Argentina, with its valuation bands for the dollar set in April as part of its program with the International Monetary Fund (IMF), has been pursuing a light version of this approach, with direct and indirect mechanisms in place to keep the dollar within a slowly expanding range. Another collateral effect is that borrowing costs for businesses rise dampening growth. This has also been the case in recent months for Argentina, where rising borrowing costs, a deteriorating current account, and sectoral declines in areas such as industry and construction have flattened growth.
The economy is still expected to see strong growth this year. Just last week, the IMF estimated a real growth rate of 4.5 percent. But overall, the economy has stagnated, and public sentiment has worsened. Voters may be less concerned with inflation than they were, but they have become increasingly worried about growth. The government, however, has remained committed to its exchange policy, selling hundreds of millions of dollars in recent weeks to keep the value of the peso within the valuation bands. Such a selloff triggered alarms in September, as bondholders fretted over the loss of scarce reserves that the country needs to meet its mounting foreign debt obligations.
Here is where the exchange rate-based stabilization strategy kicked in, as the government had refused to buy dollars to accumulate reserves in recent months to prevent any pressure on the exchange rate. As a result, the central bank lacked the resources to meet a run on the peso and to reassure markets that dollar-denominated debt remained sustainable, fueling the crisis further.
The election, the swap, and the sustainability of public debt
Argentina has long experienced exchange rate volatility during elections as people seek to shelter their savings from uncertainty. The challenge is that, because the government decided to maintain relative control on the exchange rate into its second year, the country failed to accrue reserves and is now having to absorb the cost of exchange rate volatility with a limited toolkit. Although the US Treasury has now intervened directly by buying pesos to prop up the currency, this has so far failed to calm the market fully. Ultimately, it is likely that only the results of Sunday’s election will put an end to price uncertainty.
But another question has come up: Will Argentina be able to meet its upcoming debt obligations? That is where the discussion on the swap agreed with the US Treasury is headed, as the credit line, whose terms are secret, is increasingly discussed by both Argentina and the United States as a liquidity instrument for Argentina’s bond market. The country faces mounting debt repayment obligations in the coming years and, given that its net international reserves are still very limited, the US swap line has served as a mechanism to calm the markets.
Whether Argentina ends up activating the swap to repay creditors will depend on the government’s ability to rethink its exchange-rate policy and begin accruing reserves. If Argentina activates the swap and uses it to repay debt, then it will essentially exchange debt with creditors for new debt with the US Treasury. This new debt in turn would have its own consequent repayment risks if no reserve accumulation strategy is put in place, just as with the current concerns over the sustainability of debt to private creditors. It will also depend on the future direction of the market after the midterms, which may lead to different outcomes depending on a government victory or loss. If the government fails to secure a one-third minority and the opposition, led by the alliance of Fuerza Patria, wins the national vote, there will likely be more instability.
The day after the elections
On Monday, October 27, the markets will get their vote as they price in the results. At this point in Argentina, campaigning is over and all that the government can do is wait. In the meantime, while the US Treasury may intervene further in the peso market, the future of the US swap line will be decided in the weeks and months after that by the market’s willingness to provide Argentina with new credit to meet its external financing obligations.
Following the elections, the government will have an opportunity to move into a new phase of its economic plan, freeing the exchange rate and accruing reserves while working with allies in Argentina’s Congress to continue pushing reforms. It should move in this direction to fully free Argentina’s economy and to restart the engine of growth.
Ignacio Albe is a program assistant focusing on Argentina at the Adrienne Arsht Latin America Center.
Further reading
Image: Protesters hold an Argentina flag seen during the candlelight march in defense of the Garrahan Hospital. Members and patients of Garrahan Hospital marched demanding better wages and improved working conditions. (Roberto Tuero / SOPA Images via Reuters Connect)
