FOCUS – The Chainsaw Presidency: Can Milei Keep Cutting?
From soaring bonds to street protests, Argentina’s radical reset has delivered shocks and results — but the hardest cuts may still lie ahead.
Key Takeaways – TL;DR:
Inflation down to 43.5% YoY from 288% — but at a steep social cost.
Fiscal surplus achieved for the first time in over a decade.
Bond yields collapse, but reserves remain worryingly low.
Unemployment hits 7.9%, protests grow — especially from pensioners.
Milei faces mounting resistance in Congress and limited reform progress.
Geopolitical shift from ideology to pragmatism — with chainsaws, Musk, and IMF loans.
A year ago, I analyzed Javier Milei’s radical economic plan. The libertarian had just launched an unprecedented austerity shock therapy in a country plagued by inflation, fiscal deficits, and collapse of trust. One year later, inflation is down, bonds are up — but social pain, political fragility, and external imbalances remain. Is Argentina stabilizing, or stalling?
If you missed my previous deep dive on Milei's early presidency, you can read it here: Focus – Argentina's Economic Crossroads
This Focus takes stock of Milei's midterm test — where Argentina stands after one year of reform, what lies ahead, and what it means for markets, voters, and the global South.
Inflation vs. Recession: A Bitter Trade-Off
The headline story is simple: Argentina is no longer the global inflation basket case.
In May, monthly inflation dropped to 1.5%, the lowest level since May 2020, and annual inflation decelerated to 43.5%, down from a staggering 288% peak. Food prices even declined, offering slight relief to the poor. Core inflation came in at 2.2%, showing some underlying persistence but clearly slowing.
The deceleration has outpaced most forecasts and underscores the success of Milei’s hardline approach to spending, subsidies, and currency management.
Analysts now forecast 28.6% annual inflation by year-end, a figure Argentina hasn’t seen in decades.
Yet the costs have been high. Real wages for public sector workers dropped over 15% in the first year of Milei's term, while private sector wages rose modestly in real terms by 3.3%. Unemployment rose to 7.9% in Q1 2025, the highest in more than three years. Over 70% of Argentines now say unemployment is a greater concern than inflation. Nearly 45% of the population remains below the poverty line
The paradox is stark: Inflation down, confidence up, but growth fragile and social pain real.
Still, GDP grew 5.8% year-on-year in Q1 2025, driven by agriculture (drought recovery), construction (+6.1%), manufacturing (+5.1%), and trade (+7.3%). Private consumption grew 11.6%, its highest pace since the pandemic. On a quarterly basis, GDP rose 0.8%, after 2.0% growth in Q4 2024. However, analysts warn of fading momentum.
Industrial production has now expanded for six consecutive months, growing 5.8% in May. Key sectors included autos (+20.9%), basic metals (+15.9%), furniture (+31.8%), and non-metallic minerals (+16.7%). By contrast, output declined in metal products (-14.6%), oil refining (-10.1%), and textiles (-5.4%).
Milei's critics warned his April decision to abandon the crawling peg and float the peso within a band (1,000–1,400 ARS/USD) would spark another inflation wave. But the feared pass-through didn’t materialize. Export tax breaks, tighter spending, and confidence in the IMF deal helped keep inflation in check and strengthened central bank credibility.
The inflation battle is being won — but not without collateral damage.
Fiscal Discipline: Surpluses and Strains
Milei promised to take a chainsaw to the state — and he did.
Public spending was slashed from 44% to 32% of GDP, with deep cuts to pensions, infrastructure, public-sector salaries, energy and transport subsidies, and social programs. Thousands of public servant jobs were eliminated, often without transparent criteria. Even essential infrastructure projects — such as the expansion of a critical gas pipeline — were halted due to funding freezes.
Argentina posted a primary surplus of 0.8% of GDP in the first five months of 2025. The nominal fiscal balance also remained in the black. In January, the government made a $4.3bn payment on sovereign debt, the largest since the 2020 restructuring — funded through last year’s hard-won surplus.
However, sustaining these surpluses is increasingly difficult. Tax revenues fell 5.1% year-over-year in the quarter ending May, mainly due to a drop in income taxes from the financial sector. Real revenues declined 5.1%, while tax collection dropped 3.5%. Meanwhile, primary expenditures fell 0.6%, but with strong discrepancies: pension payments increased by over 21% in real terms amid easing inflation, while energy subsidies fell by 71% and public payrolls declined by 6.6%. Capital expenditures dropped 12.1%, and transfers to provinces — frozen last year — surged by over 150% due to base effects.
Despite sharp austerity, Milei has managed to meet key fiscal targets. Forecasts suggest the primary surplus will reach 1.6% of GDP in 2025, aligned with IMF expectations. However, a bill passed in the Senate in July proposing to boost pensions and social security spending — amounting to nearly 2.5% of GDP — poses a major threat to fiscal consolidation. Milei has pledged to veto the bill and rely on the courts to stop it if necessary.
On the markets, Milei’s credibility has brought results: Argentina’s bond yields have collapsed from over 1,500 bps to 572, reflecting growing investor trust in the government's commitment to honor debt.
Fiscal discipline has restored credibility — but maintaining it may prove politically costly.
The IMF, Reserves, and External Pressures
The new $20bn IMF Extended Fund Facility announced in April 2025 is a lifeline, not a solution.
Structured as a 48-month program totaling 479% of Argentina’s IMF quota, the facility supplements the existing $45bn arrangement. The first $12bn disbursement was deployed not as net new foreign reserves but to purchase liabilities from Argentina’s Central Bank, shifting encumbered Treasury deposits into net, liquid reserves. A second $2bn tranche is expected before the October 2025 midterms.
Yet Argentina missed key reserve targets, prompting the IMF to delay the scheduled June 13 review to the end of July. Analysts see this delay as more political accommodation than technical endorsement.
To rebuild reserves, the government has issued a peso-denominated sovereign bond targeted at foreign investors — raising $1bn at a 29.5% coupon, maturing in 2030 — and signed a $2bn repo deal with international banks. The central bank also plans to use fiscal surplus to purchase dollars without expanding the monetary base.
Milei has been cautious not to monetize the fiscal surplus. However, this approach, combined with heavy intervention in local futures markets — despite IMF restrictions — has slowed reserve accumulation. On June 9, authorities announced a move to a partially floating peso within a 1,000–1,400 band. The move is intended to limit inflationary pass-through while preventing currency overvaluation. Still, the "blue dollar" premium has widened to 24%, reflecting capital control distortions and market distrust.
Meanwhile, China’s $20bn currency swap line — with $5bn drawn — has become central to Argentina’s liquidity. Though IMF officials acknowledge Beijing’s contribution, U.S. figures like Claver-Carone and Bessent have raised alarms over geopolitical risks. Beijing rejected these concerns as outdated and prejudiced. Ironically, Argentina used the Chinese swap to pay IMF obligations in 2023.
In parallel, Argentina has secured $12bn in World Bank funding and $10bn from the Inter-American Development Bank. Still, reserve levels remain shallow despite the surplus — a key concern for the IMF. As of mid-2025, the IMF loan, political risks, and reliance on commodity exports all combine into a fragile external position.
The IMF program has offered political cover, short-term liquidity, and symbolic support. But without concrete reserve accumulation, streamlined FX policy, and diversification beyond raw exports, Argentina’s external fragility persists — with high-stakes payments looming in 2026.
Currency & Monetary Policy: Still Chained?
Milei's monetary revolution promised a clean break from the past, but implementation remains messy. The currency regime is still navigating between the old crawling peg and a liberalized float. In June, the government formally introduced a banded float between 1,000 and 1,400 pesos per dollar. However, the currency hovers tightly within this band, and market participants doubt whether it truly reflects supply and demand.
Capital controls remain deeply entrenched. While the central bank lifted some restrictions for individuals in April, companies still face severe limitations. Exporters must repatriate dollars under strict timelines, and importers struggle with administrative bottlenecks. The blue dollar premium — a key measure of market sentiment — stands at 24%, reflecting persistent distrust in the official FX regime.
Complicating matters, the government has avoided accumulating reserves the traditional way — printing pesos to buy dollars. This is intentional: Milei’s top priority remains controlling inflation, and he is determined not to inject more money into the system through monetary expansion. Instead, the administration has relied on fiscal surpluses and bond placements, leaving the central bank exposed. The use of reserves to intervene in local futures markets, despite IMF recommendations to limit such actions, has further eroded confidence.
“The government prioritised inflation, which is politically the most profitable, at the expense of the others,” said Eduardo Levy Yeyati, an economist and professor at Torcuato di Tella university in Buenos Aires. “Now the other areas are screaming for attention.”
As the peso has appreciated by roughly 40% in real terms against the dollar, imports have soared, putting pressure on small businesses and driving unemployment to its highest level in four years. Despite Milei’s repeated pledges to turn Argentina into a free-market model, business leaders remain hesitant to invest. “The private sector has never been so enthusiastic about a president, yet investment remains limited — except in energy and mining,” said one Argentine executive. “As long as currency controls remain in place and labor reform is stalled in Congress, it's hard to see that changing.”
While the central bank has curbed monetary financing of deficits and pulled back on transfers to the Treasury, it still lacks a credible independent framework. The gap between real rates and inflation remains volatile. Milei’s critics argue that without a clear nominal anchor or independent central bank, inflation expectations could resurface.
Argentina’s monetary policy is in transition. While steps toward liberalization have been taken, the currency remains partially managed and vulnerable to shocks. Full normalization will require political stability, reserve buffers, and credible communication — all still in short supply.
Political & Social Risks: The Fragile Consensus
Milei’s approval rating remains resilient, with 44% support and a 47% positive image — the highest among major Argentine leaders — according to AtlasIntel. This comes despite a formal unemployment rate of 7.9%, the highest in over three years, and growing concern among 70% of Argentines over the job market.
His governing alliance remains weak: La Libertad Avanza controls just 15% of the lower house and 10% of the Senate. To gain traction, Milei has allied with Juntos por el Cambio, Macri’s former coalition, securing key cabinet roles for Patricia Bullrich and Luis Caputo. Yet his lack of a stable majority means reforms remain fragile.
The president's anger was triggered by a heavy defeat in Congress in July, when the Senate approved motions aimed at boosting pensions and increasing disability allowances — which Milei had vehemently opposed. He vowed to veto the pension hike, arguing that the extra expenditure estimated at 2.5% of GDP threatened his hard-won fiscal surplus. Milei also blamed Vice President Victoria Villarruel, who acts as Senate president, for allowing the vote to proceed despite the government's opposition.
With pro-government senators boycotting the session, the motion passed with 52 votes in favor and four abstentions. Its backers argued the increase was essential for pensioners to make ends meet. Meanwhile, pensioners have been staging weekly protests outside Congress, rallying against Milei's austerity policies.
This legislative defeat exposes Milei's limited control over the Senate and growing tensions within his administration. His ability to sustain fiscal consolidation is now under pressure from Congress and the streets alike — and any rollback could jeopardize investor confidence and IMF support.
As Ramiro Blazquez noted, Milei lacks both dollars and consensus. That combination could turn into a potent political liability heading into the October midterms.
Structural Reforms: Reality vs. Ambition
Milei’s early promises painted Argentina’s future in the image of Germany or the U.S. within a generation. But legislative math caught up quickly. In July 2025, after much compromise, Congress passed the “Ley de Bases.” The reform dropped controversial privatizations like YPF and limited Milei’s emergency powers. Still, it marked Milei’s first major legislative win, thanks to deals with Macri’s bloc and leverage over provincial governors.
Privatization remains halting: a U.S. judge has now ordered Argentina to relinquish its controlling stake in state-run energy company YPF as partial payment for a $16bn judgment over the country’s 2012 nationalization. Judge Loretta Preska gave Argentina 14 days to transfer its shares to a BNY custody account. Her ruling noted that Argentina violated the rights of minority shareholders and failed to issue a tender offer when expropriating its 51% stake.
The plaintiffs, financed by Burford Capital, hailed the judgment. Milei, for his part, pledged to appeal and blamed former economy minister Axel Kicillof, calling him “an idiot” in a fiery post on X.
Argentina’s lawyers had argued that international comity and sovereign immunity should block the enforcement, but Preska dismissed these defenses, writing: “Comity is not a one-way street.”
Analysts say enforcing the transfer will be politically explosive and legally complicated. Under Argentine law, selling those shares requires prior congressional approval. YPF’s shares have tripled in value since Milei’s election — but dropped over 7% after the ruling.
Meanwhile, labor market reform remains stalled. Proposals to loosen severance protections and decentralize collective bargaining were stripped from the Ley de Bases or blocked entirely. Business leaders remain hopeful but cautious, citing progress in energy and mining but hesitancy elsewhere due to unresolved regulatory bottlenecks.
Structural reform remains a battleground — with the courts, Congress, and global investors all playing unpredictable roles.
Global & Regional Context
Milei’s foreign policy has shifted from fiery ideological posturing to strategic pragmatism. After initially lambasting China and Brazil, his administration extended the yuan swap line and issued a formal apology to Beijing. At the G20 in Rio, Milei shook hands with Lula, easing prior tensions.
Yet Milei has remained ideologically provocative on the world stage. Since becoming president in December 2023, he has traveled extensively abroad. One of his most publicized appearances came at the U.S. Conservative Political Action Conference, where he theatrically handed a chainsaw — his austerity symbol — to Elon Musk.
Argentina continues to rely on multilateral institutions. Access to the IMF, World Bank, and IADB brings crucial liquidity, but also strings. Commodity dependence persists: soy, beef, barley, and lithium dominate exports, while the trade deficit with China has widened.
Milei’s team has signaled skepticism about Mercosur and hinted at pursuing more bilateral, market-friendly trade arrangements. His shift aligns Argentina more closely with a pro-market bloc across the Global South, but real alignment remains a work in progress.
Argentina is dancing on a tightrope: rebuilding external credibility while avoiding strategic isolation. The president’s rhetoric still polarizes — but policy is drifting toward calculated realism.
Outlook: Turning Point or Riding the Momentum?
Argentina’s first year under Milei has produced undeniable achievements: inflation has dropped sharply, sovereign bond spreads have narrowed, and a primary fiscal surplus is holding firm. Now, economic momentum is picking up.
Growth trajectory: The IMF projects 5.5% GDP growth in 2025, citing gains in consumption, investment, and agriculture. BBVA echoes this outlook, forecasting a robust recovery after the contraction in 2024. Still, part of this growth reflects a base effect after last year’s slump.
But growth remains uneven. Lagging sectors like construction and industry risk undermining job creation, keeping unemployment elevated. The strong peso supports disinflation but weakens export competitiveness, potentially stalling the momentum.
Capital markets: Local equities remain muted despite the bond rally, reflecting caution amid FX controls, slow reforms, and uncertainty about political direction.
External and FX fragility: Argentina’s external position still depends on IMF support, slow reserve rebuilds, and commodity cycles. Analysts expect gradual devaluation within the band, but warn that real appreciation could pressure the trade balance.
Political risks: Mid-term elections will test Milei’s mandate. A strong showing could empower further reforms — central-bank independence, labor deregulation. Without it, gridlock and fiscal backtracking become real threats.
Bottom line: 2025 could mark Argentina's long-awaited turning point — with sustained growth, disinflation, and regained global trust. But that will require reform continuity, political strength, and credible execution.
In short, Milei has earned time — but not yet trust.
Conclusion & Takeaway
A year into his presidency, Javier Milei has delivered results that many thought impossible:
Inflation collapsed from hyperinflation to ~44% YoY.
Fiscal discipline returned, with surpluses and timely debt service.
Global credibility was restored through bond-market rallies and the IMF package.
Economic recovery is underway — growth of 5.5% in 2025 now seems achievable.
Yet, the rebound is still fragile:
Social pain lingers — unemployment remains high and real wages haven’t fully recovered.
Structural reforms — like labor market changes and privatizations — are incomplete.
External imbalances pose risks, with reserves still shallow and currency policy inconsistent.
Political risks loom as midterms near, and rising social dissatisfaction could unravel fiscal gains.
The verdict: Argentina’s economic turnaround has begun — but turning stabilization into sustainable prosperity will require discipline, political courage, and determined follow-through. Milei may have opened the window of opportunity. Whether Argentina becomes the next success story of free-market reform — or collapses under its contradictions — depends on what Milei does next.
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