Lower inflation brings popularity. Popularity brings power, which helps with lowering inflation
I the world mid-term elections for half of the seats in a city hall would be ignored by presidents and markets alike. Not so in Argentina. Javier Milei, the libertarian president, made his spokesperson his party's leading candidate in elections held on May 18th in Buenos Aires. He cast the capital's ballot as a referendum on his government. His party won 30% of the vote, compared with 27% for the leftist Peronists and 16% for the centre-right , the party of a former president, Mauricio Macri. Argentine shares soared in response and sovereign bonds rose. Having beaten Mr Macri in his stronghold, Mr Milei intends to sideline him entirely, trying to subsume the ahead of national mid-terms in October.
Argentine politics have been in flux since Mr Milei won the presidential race in late 2023 running as an angry outsider. He has slashed spending and brought raging inflation sharply down. In April he partially floated the peso. Yet Argentina has a history of woeful economic policy, and Mr Milei's steps are not enough. A reformer also has to show repeatedly that he can keep the Peronists out. A struggling government and resurgent Peronists, even in minor elections, can spook markets and send the economy spiralling. This week's win is a boost, though despite compulsory voting, turnout was at a historic low of 53%.
Two conclusions emerge. One is that politics will probably get angrier and dirtier. Mr Milei's style is to rage against perceived enemies; the press is now a prime target. "People don't hate journalists enough," is his new catchphrase. Mr Milei also made his spokesperson the lead candidate while keeping him in post and giving him juicy announcements close to the election. More worrying was a fake video, generated using artificial intelligence, purporting to show Mr Macri urging people to vote for Mr Milei's party in order to block the Peronists. It was shared on election eve by social-media accounts close to the president, including one widely reported to belong to his powerful spin doctor.
The second is that the government will continue to think that bringing inflation down is the path to electoral success -- and will bet everything to that end. That is why after allowing the peso to float within a band, prompted in part by the , the government has done all it can to keep the peso strong, avoiding a depreciation that would push inflation up. Interest rates remain high, while the government has tweaked rules to encourage foreigners to convert dollars into pesos in order to profit from a form of carry trade. A temporary tax break is pushing soyabean exporters to sell their harvest fast, also boosting the peso. The central bank has declared it will not buy dollars to rebuild its reserves until the peso touches its limit of 1,000 to the dollar, and has allegedly fiddled in the futures market to strengthen it. To the same end the government is expected to announce a loosening of rules on tax evasion, encouraging Argentines to bring an estimated $270bn hidden in mattresses back into the formal economy.
The approach is working, for now. Post-float depreciation was modest. Monthly inflation fell to 2.8% in April. Mr Milei may benefit from a flywheel effect whereby markets cheer his victory, which in turn boosts sovereign bonds and confidence in the peso, further staving off an inflationary depreciation. If inflation keeps falling he could win handsomely in October.
But flywheels can break down. The peso remains very strong, and so vulnerable to a depreciation, especially once the harvest ends in July. (Mr Milei surely hopes to delay any reckoning until after the mid-terms.) Boosting the peso makes exports less competitive. The central bank's refusal to buy dollars to rebuild net reserves comes as it needs $5bn-odd by mid-June to meet the demands of the 's new programme. It is preparing to borrow to do so, but that only delays the problem. The other risk is that the Peronists, who increased their seat share in Buenos Aires, do well in the mid-terms. That could spook people into dumping the peso, thus prompting inflation. For now such worries have not punctured Mr Milei's euphoria. ■
