MW Crunch time for Argentina as local elections this weekend represent referendum on Milei

By Jules Rimmer

Provincial elections this Sunday will provide a litmus test for Milei's economic policies

Sunday's provincial elections in Argentina will serve as a referendum on the economic stewardship of its president, the flamboyant, controversial and radical in equal measure, Javier Milei. If the outcome is narrow enough to suggest his La Libertad Avanza may prevail in October's mid-term elections, then Argentinian risk assets should rally and recoup much of the territory they have recently conceded.

That's the call from Morgan Stanley whose assessment of Sunday's vote, published in a report this week and titled "Long Argentina into the election season" presents a compelling trading narrative for investors. A result suggesting a victory for Milei in October would see Argentina's bond prices jump 11 percentage points, they predict, while Argentinian stocks AR:SPMERVAL , valued at just 7.9 times forward earnings, also look attractive.

"Current market pricing thus implies an excessive probability of an adverse outcome," is Morgan Stanley's conclusion.

Since he was elected president of Argentina in Dec. 2023 with a manifesto promising a program of radical economic reform, Mieli has been the darling of free-market economists and financial libertarians. President Donald Trump hailed him as " a man who can make Argentina great again" and Elon Musk sought to emulate his chainsaw-wielding antics with his DOGE initiative back in spring of this year.

A gushing interview from Niall Ferguson featured in The Free Press remarked that "the prerequisite for an economic miracle is an economic disaster" and Argentina certainly qualified with that.

Milei promised to impose fiscal discipline and tackle its perennially contracting economy, its hyperinflation and its massive indebtedness - $40 billion owed to the IMF alone - with major cuts in government expenditure and bureaucratic waste to balance the books. Punishingly high interest rates brought down inflation from 211% in 2023 to 43% in May 2025, as Argentina generated a fiscal surplus for the first time since 2008 last year and economic growth rose from -1.5% in 2023 to +7% this summer.

However, the stock market, up 170% in 2024, has declined by almost a third since January and bonds have experienced sharp falls with the spread of Argentina's dollar bonds over U.S. Treasurys widening to 8.3%, effectively shutting them out of international borrowing markets. High real interest rates (local currency, short-term bonds yield around 60% versus inflation around 35%) are proving unpopular with voters and corporates.

The U.S.-listed Global X Argentina ETF ARGT, which has gained an annualized 39% over the last three years, is down 6% this year.

The peso (USDARS) , allowed to float freely in May and surprisingly strong for a while, has also succumbed to selling pressure of late and has fallen by roughly a fifth against the dollar over the summer. The peso depreciation may be partly attributable to the kneejerk response of households to dollarize before elections but it has affected consumer confidence. The peso has threatened the lower band of its permitted trading range on several occasions.

Argentina: Spot FX has been weakening over the summer and trading toward the lower band of its permitted trading range

Milei's popularity has also suffered of late as his sister and chief of staff became embroiled in a corruption scandal with allegations of bribery. The opposition Fuerza Patria party, legacy Peronists, who advocate higher government spending have been vociferous and relentless in their criticism of Milei's economic agenda. If their margin of victory is fewer than three percentage points, market participants will extrapolate a positive outcome for Milei come October.

Argentina: Confidence in the government

For Morgan Stanley's strategist Simon Waever, though, risks are clear and present so their recommendation is for "moderate size" only given the severe downside scenarios possible. Were Sunday's voting to imply Milei loses control in October, then policy continuity and reform momentum are threatened.

Markets want Milei to command sufficient political capital going into 2026 to advance his supply-side reform agenda with changes to the labor code, followed by tax and pension reforms, all combining to drive the investment cycle and economc growth.

A preview of Sunday's election released by Citi noted improved chances for a relief rally in the event Fuerza Patrai failed to secure a convincing margin ,and a poll of investors they conducted found almost two thirds of respondents thought the upshot of the ballot could be positive. Stocks with ADR listings in the U.S., like banks Galicia $(GGAL)$ and Macro $(BMA)$, were pinpointed as attractive.

-Jules Rimmer

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September 05, 2025 03:14 ET (07:14 GMT)

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