Milei drags his reforms through the senate

With protests roaring outside, 13 hours of debate came to an end inside Argentina’s senate yesterday (Thursday) when Vice President Victoria Villarruel broke a tie, passing a package of watered-down economic reform bills, 37-36.

And that’s a bitter-sweet win for Argentina’s libertarian president, Javier Milei.

But before we dive into why, let’s retrace our steps. Milei won the presidency in December 2023, with a historic 55.7% of the vote. He campaigned on an unorthodox platform to “chainsaw” state spending as a way to tame inflation and pull Argentina out of its rolling economic crises.

But as a political newcomer with few friends in congress, he’s had to push through many of his ‘shock’ reforms using executive powers. In six months, he’s:

• Laid off 50,000+ state employees
• Devalued the peso by 50%
• Cut fuel and transportation subsidies 
• Axed price controls for food and rent, and
• Halted publicly funded projects.

The result? He’s turned December’s monthly 2 trillion peso fiscal deficit into April’s 265 billion peso surplus. Monthly inflation also cooled for the fifth straight time in May (though from one of the world’s highest bases).

And yet… tapping the brakes on all that spending has also meant that poverty levels are up, and soup kitchens are busy.

Milei’s refrain is “no hay plata” (there’s no money): the short-term pain will be worth it, he says, to put Argentina back on a growth path. And if we’re to believe the polls (below), many folks believe Milei.

So when yesterday’s vote passed, his vice president cast an eye at the cacerolazos outside (protesters banging casserole pots), and said “today, we have two Argentinas”: those respecting voter wishes, and those railing against them.

As for the details of the reform package? It’s a behemoth by name (Law for the Bases and Starting Points for Argentines’ Freedom) and by nature (~230 articles). Locals refer to it simply as the ‘Bases Law’.

After earlier failed attempts and revisions, Milei’s reform package is now around half its original size, and aims to… 

• Privatise two state companies (he wanted 40)
• Grant emergency powers to the president
• Incentivise more investment, and
• Further trim Argentina’s fiscal deficit (though the senate rejected his attempt to reinstate income taxes)

Foreign investors have welcomed the news, driving up Argentina-linked bonds and stocks (plus the black market peso). But that bump, while welcome, wasn’t huge, reflecting a few different possible market signals:

• Some investors might’ve seen this week’s developments as proof Milei can pass legislation and reform Argentina’s economy
• Others might’ve seen it all as proof of the difficulty of Milei’s plans, with this watered-down bill now Milei’s high water mark, and
• Many will have already priced it all in either way.

Still, those positive market numbers might help him maintain another key number: his approval rating. Notwithstanding all the drama, he’s still above 50%. And among those that voted for Milei, he’s soaring at 75%.

But the longer it takes Milei to tame inflation and put the country back on a growth path, the more he risks losing both his market and approval numbers.

INTRIGUE’S TAKE

Here’s the thing: investors don’t just want reforms passed by a single vote while protestors clog the streets, only for someone else to come along next election and hit ctrl-z on the whole thing. Investors want those reforms baked in, with broad support, for the long haul.

So maybe Milei thinks okay, the sooner he rams his reforms through, the sooner they work, the sooner they then get baked in, and the sooner investment returns. But the risk is, the quicker he rams it all through, the more pushback he gets from his country, and the quicker he’s turfed out. There’s no easy option.

And that’s the thing about his legislative win this week – it lands him awkwardly (uffff so awkward) right in the middle: maybe enough progress without triggering too much pushback? Or maybe not enough progress, but still triggering pushback.

Also worth noting:

• Milei’s reform package now goes back to the lower house where it seems likely to be approved, though the government is hoping to reinstate some of the articles it lost in the senate.
• The International Monetary Fund, which has a $44B loan program with Argentina, unlocked another $800M in funds for the country yesterday after applauding the program as being “firmly on track.”