Javier Milei, free-market revolutionary

This resolve has guided a blast of reforms aimed at shaking Argentina out of decades of humiliating decline caused by rampant inflation, absurd handouts and thickets of regulation. The result has been better than almost anyone expected: inflation is down sharply, government spending is almost 30% lower in real terms. These successes could still be reversed; Argentina’s recent history is littered with failed economic reforms. But fortified by the clarity of his convictions and immersed in free-market theory, Mr Milei has a better chance than those who came before him.

He is enjoying his best moment since taking office. His two most important audiences, markets and Argentines, are chuffed. The JPMorgan country-risk index, an influential measure of the risk of default, has fallen from around 2,000 when he took office in December 2023 to about 750 now, its lowest level in five years. Despite huge spending cuts, Mr Milei is more popular with Argentines than his two predecessors were after their first year. In recent months, his popularity has risen.

Argentines are impressed by falling inflation. It has long been their scourge, fuelled by wild government overspending financed by printing money. When Mr Milei took office inflation was running at 13% month on month. It spiked to 25% after he devalued the artificially and unsustainably strong peso. It is now under 3% per month (see chart 1).

The reduction rests upon Mr Milei’s brutal cost-cutting. That impresses markets. He campaigned brandishing a chainsaw, then delivered a primary surplus in his first month—and every month since (see chart 2). The surplus, crucially, eliminates the pressure for the central bank to finance spending by making “temporary" transfers to the government, which are in fact rarely paid back, a form of money-printing.

Mr Milei says he has tried to make sure that the cuts fall upon the state itself, more than its poorest citizens. He slashed the number of ministries from 18 to eight, halted the vast majority of public works and ended most transfers to provincial governments. According to Invecq, an Argentine economic consultancy, spending on both public salaries and universities is 20% lower this year in real terms than it was in 2023. Still, the biggest savings came from holding down the real value of pensions.

At the same time Mr Milei has been trying to clean up the balance sheet of the central bank, which had previously pumped a vast amount of pesos into the system. Its foreign reserves were $11bn in the red when he took office. The balance has improved, but remains negative. Some $20bn has re-entered the formal banking system, thanks to a tax amnesty that brought dollars out of mattresses and home from offshore accounts.

Alongside these efforts to stabilise the macroeconomy, Mr Milei and his team have slashed reams of red tape tangled around everything from air travel and apartment rentals to divorce and satellite internet. He is not finished. “Every day we deregulate and we still have 3,200 structural reforms pending," he says. Elon Musk, whom he recently met at Mar-a-Lago, is keen to follow suit, he says.

The cuts hurt. The economy entered a recession this year and unemployment jumped. The share of Argentines who are poor surged to 53%, up from 40% in 2023. But the recession seems to have bottomed out. Growth should help ease poverty and unemployment, though it will add inflationary pressure. The government hopes a new law which provides whopping investment incentives, such as multi-decade tax breaks and customs exemptions, will attract capital and boost growth.

To get that law through Congress Mr Milei displayed a streak of pragmatism. “I’ve learned a lot about doing politics," he says. He eventually empowered his chief of staff to make compromises with the very same political elite that he decries as “thieves" and “criminals". Surprisingly, Mr Milei now says that he has no enemies in Argentinian politics, only rivals. Even those rivals, he says, “do not explicitly want the country to do badly".

The president’s newfound pragmatism shines through in foreign affairs, too. While campaigning in 2023 he repeatedly insulted China. At one point he pondered whether it was right to “trade with an assassin". Now it is “a fabulous partner," he gushes, having recently met China’s President Xi Jinping. “They don’t ask anything. They want to trade calmly." In a similar vein, he once called Brazil’s president Luiz Inácio Lula da Silva, known as Lula, “a corrupt communist". Now he is more nuanced. “I’m not going to be friends with Lula, but I have an institutional responsibility," he says, enthusing over a recent deal to sell Argentine gas to Brazil.

All this bodes well for Argentina’s continued economic recovery. But big risks loom over Mr Milei’s successes. One is political. He has benefited from disarray among the opposition that will not last forever. Nor will the public’s tolerance for weak growth, high unemployment and poverty, even if inflation has been wrestled down. By frankly telling voters that cuts would hurt he lowered their expectations. Now Mr Milei trumpets that “Argentina is entering its best moment in 100 years." That is a harder expectation to manage, especially if Argentines do not feel such elation in their wallets. If the Peronists rise in the polls or unmanageable protests break out, it could send investors running and threaten the recovery.

Another risk is economic. The peso looks overvalued again. The government inherited and maintains capital controls. It also sets the official exchange rate; it devalued the peso by 50% in December 2023, then by 2% each month since. But because inflation has been running higher than 2% per month, the real exchange rate has been rising. It is now approaching the level it was at before Mr Milei took office. Argentines understand the peso’s strength; some 55 buses carry eager shoppers to Chile every day, where goods are much cheaper.

This is a drag on exports and growth. And Mr Milei cannot maintain the scheme without capital controls, but these put off investors who want to be sure they can get their money out of Argentina, not just in. If and when he does finally remove capital controls and free up the exchange rate, there is a risk of a sudden depreciation. That could set off another bout of inflation, undermining Mr Milei’s signature achievement, and perhaps his popularity. Overvaluation is a classic Argentine problem. It tends to end in crisis.

Mr Milei rejects all this. He says his reforms justify the peso’s value, and that capital controls don’t deter investors because he has promised to remove them next year. Moreover, he declares, “we are not in a hurry." If he had more foreign finance he could remove capital controls sooner; he needs hard cash to defend the flexible exchange rate. But the IMF appears unenthusiastic about that use for new money. This may be curdling relations with the Fund. Argentina owes it $42bn. Mr Milei pointedly emphasises that new finance from the IMF “is only one of the options".

The question of the peso’s value is manageable, for now. Markets are not betting on an imminent devaluation as they did, wrongly, earlier this year. But on longer timelines risks remain. Donald Trump’s policies could push the dollar higher and pressure on the peso could rise sharply, warns Robin Brooks of the Brookings Institution, a think-tank.

A different worry is that in his zealotry, Mr Milei may undermine Argentina’s checks and balances. “I don’t deviate one millimetre from the rules that are agreed to in the Constitution," he says. He does, however, want to reform the courts. Nothing wrong with that, but to do so he has nominated a judge to the Supreme Court who is widely considered unqualified and who faces allegations that he manipulates cases to benefit the well-connected. The nomination has been so slow to progress through the Senate that the government has raised the prospect of forcing it through by decree, a controversial move. Mr Milei also claims that 85% of what is written in the Argentine press is lies.

A final risk comes from Mr Milei’s own volatility. He has recently fallen out with his vice-president. At the very least that will make it harder for him to pass laws in the Senate. And he is increasingly engaged by culture wars, much like his allies abroad. He rails against “transgender ideology", abortion and climate change, which he denies is caused by man. These causes are Marxism’s new front, he claims. But with Argentina’s economy still balanced on a knife edge, any distraction is a danger.

Editor’s note: You can read a lightly edited transcript of our interview with Mr Milei here. A transcript in Spanish can be found here.

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