Has Argentina’s Milei proved his critics wrong? With Alejandro Werner

Episode Summary

Executive Summary: The episode examines Javier Milei’s first 18 months in office and concludes that he has made striking progress on fiscal and inflation stabilization, but Argentina remains fragile. He rapidly eliminated the budget deficit and curbed inflation, yet growth, reserves, and investment remain weak, leaving his reform project dependent on continued political support and future access to foreign currency and markets.

Main Topics: Argentina’s long economic decline (Priority: 5/5): The discussion sets Milei’s reforms against decades of recurring crises: hyperinflation, defaults, weak productivity, and stagnation rooted in protectionism, welfare-state expansion, and commodity dependence. Milei’s radical fiscal adjustment (Priority: 5/5): Milei’s core achievement was an unusually fast budget turnaround, cutting the deficit from 5% of GDP to surplus within a quarter through deep spending cuts and state retrenchment. Currency strategy and disinflation (Priority: 5/5): Although Milei campaigned on dollarization, he instead devalued the peso, shifted to a crawling peg, and used exchange-rate policy to bring down inflation while accepting some distortions. Real-economy pain and social outcomes (Priority: 4/5): The stabilization package caused recession and an initial poverty spike, though poverty began recovering as inflation fell and social transfers were protected in real terms. Weak reserves, external financing, and IMF reliance (Priority: 5/5): Argentina still struggles to accumulate reserves and regain market access, so the IMF remains central to financing and credibility; this is described as a reputational risk for the Fund and a continuing vulnerability for Argentina. Political constraints and the 2025 midterms (Priority: 4/5): Milei governs without a congressional majority, so the October 2025 midterms are crucial for locking in reforms, building a pro-Milei legislative bloc, and reducing policy uncertainty. Prospects for durable reform (Priority: 4/5): Werner argues the key test is whether Milei can convert stabilization into growth, investment, tax/pension reform, and lasting institutional change before political patience runs out.

Key Arguments: Argentina entered Milei’s presidency in severe distress: no reserves, no market access, high inflation, high poverty, and collapsing confidence. Milei’s fiscal austerity was extraordinary in speed and scale; he is credited with balancing the budget almost immediately and convincing markets he would not backtrack. Dollarization was not feasible because the central bank lacked dollars; instead, Milei used a devaluation and crawling exchange-rate regime to stabilize prices. Inflation fell sharply, but the stabilization came with a recession and an initial surge in poverty, showing the social cost of the adjustment. The absence of major protests reflects the weakness of the opposition, the disarray of Peronism, and Milei’s success in preserving support for targeted social spending. Argentina’s real challenge is not only lower inflation but generating export earnings and reserves to service external debt and re-enter capital markets. The IMF is heavily exposed to Argentina, but the bigger issue is reputational: the country has repeatedly failed to graduate from IMF dependency. Milei’s reform agenda could become durable only if midterm gains strengthen his congressional position and he translates macro stabilization into legislation. Foreign investors like the policy direction but remain cautious because Argentina has a long history of reversals and the political outlook is still uncertain. Werner estimates Milei’s chances of avoiding a return to high inflation as fairly high, but stresses that full success still depends on growth, reserves, and institutional consolidation.

Data Points: GDP growth at Milei’s takeover: almost -2% - Argentina’s economy when Milei took office Monthly inflation in November 2023: almost 13% - Before Milei entered office Budget deficit: from 5% of GDP to zero and slight surplus - Fixed in a quarter after Milei took office Inflation in Q1 2024: 52% in the first quarter - After the initial price burst following devaluation Inflation in Q1 2025: 8% in the first quarter - After disinflation took hold Recent monthly inflation: 1.5% per month - In the last two months mentioned in the interview GDP contraction: 1.7% - Economic contraction associated with the adjustment program Poverty rate before Milei: around 39-40% - In the last two years of the previous government Poverty rate after adjustment: 52% - In the first half of 2024 Exchange-rate devaluation: 100% - Milei devalued the peso on taking office Initial monthly devaluation pace: 1% per month - Crawling peg after devaluation Exchange-rate band width: 40% wide - New IMF-backed exchange-rate flexibility band Argentina country risk before Milei: above 2,000 basis points - When Milei came to power Argentina country risk now: around 750 basis points - Still elevated, limiting market access IMF new lending: $20 billion - New April agreement with the IMF Earlier IMF program: $45 billion - Program put in place with Macri six years earlier Additional IMF disbursement: $12 billion - Already disbursed under the new arrangement Net reserves: about $5.5 billion - Current level mentioned, still weak External debt obligations over next three years: $45-50 billion - Argentina’s upcoming repayment burden Senate seats held by Milei/close allies: 13 of 72 - Congressional minority position Lower house seats held by Milei/close allies: 79 of 257 - Congressional minority position Potential 2025 growth: 5% rebound growth in 2025 - Reference scenario discussed for the economy Potential medium-term growth: 3.5% to 5% - Possible growth path for the next two years Confidence estimate of avoiding high inflation: 60%-75% chance - Werner’s qualitative estimate of Milei’s success odds

Pivotal Quotes: "He basically fixed the budget deficit in a quarter." — Alejandro Werner: Describing Milei’s fiscal adjustment "If you want to dollarize, you need dollars. And Argentina didn't have any dollars at the central bank." — Alejandro Werner: Explaining why dollarization was not feasible "The opposition is completely destroyed." — Alejandro Werner: Explaining the lack of large-scale protests against Milei

Implications: Milei has made stabilization credible, but durability depends on reserves, investment, and political consolidation. If growth follows and midterms go well, Argentina could finally break its cycle of crisis; if not, old inflationary and debt problems could return.