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Argentina: Milei would struggle to govern with congressional minority; opposition could help somewhat

by Santiago del Carril and Clara Agustoni

A potential government led by Argentina (CCC+/Caa1/CCC-) libertarian presidential candidate Javier Milei would have difficulty governing with a minority in Congress, according to two credit research analysts, a source close to the IMF, and a bondholder. However, the main opposition party, Juntos por el Cambio, would likely support the passage of several of Milei’s policies, they said.  

“If Milei were to repeat Argentina’s primary results in the general elections, his libertarian party would gain 40 seats in Congress and eight seats in the Senate, but without institutional muscle and winning any governors, it would be challenging for him to pass any reforms in his campaign platform,” Pedro Siaba Serrate, head of research and strategy at the Argentine portfolio managing firm PPI, told Debtwire

However, Milei’s La Libertad Avanza party could form a coalition with Juntos por el Cambio, which would have 107 seats in Congress and 27 seats in the Senate if the primary results were to hold, enough for the coalition to have a majority in Congress, according to a PPI report. Argentina has 257 members of congress and 72 senators. 

“Under the most optimistic scenario, Milei could use the Juntos por el Cambio governing structure to implement policies in the Senate, as they would have a majority in both chambers. I think this could eventually happen.” Siabe Serrate said. 

Recently, Milei has toned down his campaign platform after winning the primaries with 30% of the votes, with the general elections scheduled for 22 October. In TV interviews since the primaries, he has said that the dollarization of Argentina’s monetary system wouldn’t occur from one day to the next, that dissolving the Central Bank wouldn’t be done immediately, nor would lifting currency controls.

“If we aren’t able to eliminate the Central Bank via political channels, we will put even more pressure on cutting the budget to lower inflation,” Milei said today during a conference for the Council of the Americas in Buenos Aires. 

Abolishing the Central Bank, if implemented, would prove deeply unpopular, according to a bondholder involved in Argentina’s previous debt restructuring negotiations. 

Milei sometimes simplifies concepts to communicate them to society better, a source close to his campaign explained. When he says he will eliminate the central bank, this is not something he plans to do immediately or in an irresponsible way. The candidate is not even considering lifting FX restrictions from one day to the next and knows there is a hyperinflation risk if he does that. He plans to do these things sequentially and reasonably, the source close to the campaign said. 

A representative for the La Libertad Avanza party did not respond to a request for comment.

“The issue is whether Milei will be able to govern or not,” said Andres Borenstein, an economist at the Econviews consultancy in Buenos Aires. “Milei has no governors and would hold only 10-15% of Congress. It will be very difficult to pass laws. If it were difficult for [former president Mauricio] Macri to govern when his party held a third of Congress, Milei would have less than a half of that.”

“The market is going to be very anxious until the general elections, and the upside that the Argentine sovereign debt — which was viewed as very cheap — will now be on hold until the general election results,” Borenstein said. 

Argentina’s USD 20.5bn 3.625% bond due 2035 traded at 29.9 on 14 August compared to 26.4 on 15 June, according to MarketAxess. The USD 10.5bn 3.5% bond due 2041 traded at 31.4 on 14 August compared to 28.5 on 15 June.


Rule by Decree

Previous Argentine presidents have issued executive decrees that allow them to dictate laws without needing a majority in Congress. Its use is only prohibited for criminal, electoral, and tax legislation. At least one of the chambers of Congress must approve a decree for it to be valid, according to the legal framework for decrees (Law 26.122). 

Former President Cristina Kirchner issued a decree to intervene in the previously privately owned oil firm YPF when initiating its expropriation in 2012. She also issued a decree in 2010 to remove Central Bank president Martin Redrado from his position after he opposed using the bank’s reserves to pay for public debt. Macri issued decrees during his administration, which never had a majority in either chamber, to establish foreign exchange controls, fix fuel prices, and renegotiate public debt.

“I think it could be similar to the situation faced by the previous [Macri] administration, a scenario in which Milei has the support of Juntos por el Cambio with reforms. I think there are a lot of coincidences between the two parties. If there are difficulties, they can advance with decrees. Milei also mentioned doing a referendum,” Martin Castellano, Head of LatAm Research at the Institute of International Finance (IIF), said. 

Milei could get support to reform the government’s public finances, maybe including a privatization program. Castellano said. The fiscal issues will be where most of the focus is, but it isn’t easy to implement. “But I think he could work with the main opposition party and get support to implement it. It is important to maintain investor confidence and keep working with the IMF given their role as the country’s main creditor,” Castellano said.

Milei’s economic team had a more collaborative attitude with the IMF during meetings last week, being more in favor of the current government receiving financing from the IMF so there can be a smooth transition, Argentina’s economy minister Sergio Massa said during a press conference 23 August. 

Milei would advocate for harsher budget cuts than what the IMF is asking for, he said in an interview with television station TN. 

Although the “fund continues to be the fund,” the IMF sees things differently now, a source close to Argentina’s delegation to the IMF told Debtwire. The IMF knows that a sharp adjustment creates a decline in production and a smaller tax base, meaning a continued deficit without being able to pay the debt. It understands if Argentina adjusts too much, the country won’t grow, and its tax base will decline, preventing Argentina from paying its debt service, this source said.

Another issue is the proposed privatizations of YPF and state-owned airline Aerolineas Argentina, which Libertad Avanza’s candidate for mayor of the City of Buenos Aires, Ramiro Marra, assured would be implemented in an interview with TV station C5N on 23 August.

“YPF is also a company that we need to privatize because it has clearly been used for party politics,” Marra said. On the other hand, he said that for Aerolineas Argentina, the party is working on a plan for employees to administer the company. 

“It would be challenging for Libertad Avanza to privatize the 51% of YPF that is state-owned,” a source close to the IDB told Argentina. “By law, it would require a two-thirds majority in Congress, and I don’t think that would be easy to do.”

“Some of Milei’s ideas could be very good if implemented, but the market will judge you on the probabilities of execution and whether they will be well-executed,” Siaba Serrate said.