In Argentina, President Javier Milei's sweeping economic policy changes have dramatically improved the outlook for the country's short- and medium-term economic and financial stabilization. But absent political-institutional reform, the risk of a return to instability will increase over the long term, largely due to the political system's inability to manage fiscal-distributional conflict. During former Argentine President Alberto Fernandez's term (2019-2023), unsustainable economic policies and a major pre-electoral surge in government spending nearly pushed Argentina's economy into hyperinflation. Despite another debt restructuring in 2020, the Fernandez government failed to re-establish macroeconomic stability and doubled down on interventionist economic policies. But since President Milei took office in December 2023, Argentinian economic policy has undergone radical change. Anchored on a massive fiscal adjustment, Milei's reform program has received support from the International Monetary Fund (IMF) and has led to a sharp decline in inflation while improving Argentina's government and external debt position. But the reforms have also led to a sharp drop in economic activity. In the first quarter of this year, the economy contracted 2.6% over the previous quarter and 5.1% compared with the same quarter in 2023. With insufficient support in the Argentine Congress, the Milei administration has made extensive use of its executive powers and presidential decrees to push through macroeconomic adjustment policies, although it was able to push a package of structural reforms through the legislature in June.

• Milei's Libertarian Party only controls 38 of the 257 seats in Argentina's Chamber of Deputies, and seven of the 72 seats in the Senate, complicating structural and (to a lesser extent) macroeconomic economic reform. On June 28, Congress passed Milei's proposed Framework Law, which comprises far-reaching market liberalization and structural reform. On Aug. 22, Congress approved a pension reform, which would have added to government expenditure and weakened adjustment policies. While it was ultimately vetoed by Milei, the pension bill highlighted his administration's challenge of winning congressional support for its proposed structural economic reforms. 

Since taking office, Milei has made solid progress toward putting Argentina's economy on a more solid footing. A massive fiscal adjustment, which included the lifting of millions of pesos in subsidies for public transportation and energy and severe spending cuts in real terms in areas such as education and pensions, has enabled the government to start generating primary fiscal and even overall surpluses. The last time Argentina registered a full-year primary and an overall fiscal surplus was in 2010. It has also enabled Buenos Aires to end the inflationary monetary financing of the government and improve the profile of domestic debt through a major domestic debt swap. On the external debt side, Argentina has received financing assurances from multilateral lenders, including China, which has pledged to roll over its central bank swap line. Small current account surpluses have also helped improve the financial position of Argentina's central bank. The combination of fiscal and current account surpluses has enabled Argentine authorities to not only end the monetary financing of fiscal deficits, but also to start rebuilding the position of the central bank's foreign exchange reserves, which nonetheless remains weak. 

• The IMF successfully concluded its eighth review of Argentina's current program in June. Argentina exceeded all quantitative performance criteria by a significant margin and made notable progress on structural benchmarks.
• The IMF expects that the government will be able to access international capital markets by the end of 2025. As long as Argentina over-delivers on quantitative program targets, the IMF will continue to provide support, thus limiting near-term financial risks.
• As of July, the Argentine central bank's gross foreign exchange reserves stood at $28 billion, the lowest level since 2016, while net reserves stood at a negative $5 billion.

But despite these initial successes, the medium-term outlook for economic and financial reforms in Argentina remains more uncertain, particularly as far as exchange rate and capital account liberalization are concerned. First, while parts of the economy may be stabilizing, a prolonged domestic economic downturn would weaken Milei's popularity and might embolden political opposition, which would worsen Argentina's reform outlook. The IMF forecasts an economic contraction of 3.5% in 2024 before rebounding by 5% in 2025. Second, after the initial fiscal adjustment, which was largely pushed through by executive decree, Milei's government has agreed with the IMF to pursue extensive expenditure and revenue reform. Buenos Aires is also preparing a revenue-neutral tax reform aimed at enhancing the efficiency and simplicity of the country's tax system. On the spending side, the Milei administration aims to strengthen the sustainability and equity of Argentina's pension system, while also enhancing the system of intergovernmental transfers. This will ultimately require support in Congress, and will prove politically more challenging. Third, the Milei administration wants to remove capital controls and liberalize the Argentine peso's exchange rate, in an effort to revive international investor interest in Argentina. For the time being, however, multiple currency practices and exchange restrictions remain in place that will continue to hinder resource allocation and investment inflows. Milei's government has verbally committed to establishing an inflation-targeting monetary and flexible exchange rate regime, including a multiple currency regime. But to prevent the peso from depreciating sharply following liberalization and limit the risk of another inflation spike, Argentine authorities would need to accumulate larger foreign exchange reserves, which will prove difficult amid the peso's strong real exchange rate and Argentina's low interest rates. For the Milei administration, this creates an economic and political dilemma, as an inflation spike brought on by a large devaluation would risk damaging its popularity among voters. But without faster currency depreciation, the government will struggle to accumulate foreign exchange reserves. This is partially why the Milei administration is seeking to increase foreign exchange reserves through a recently announced tax amnesty. It is also why Buenos Aires is more likely to fully liberalize exchange controls in the short term. This will not derail Argentina's IMF program and will, in turn, have a limited impact on overall economic and financial risk in the country. However, if Argentina does not take further measures to open the capital account and fix its balance-of-payments problem, foreign investors will remain reluctant to invest in the country for fear of facing restrictions on their ability to repatriate capital and profits. 

• President Milei is politically incentivized to continue his reform push ahead of the 2027 presidential election, as economic conditions in Argentina will begin to gradually improve and should turn fairly favorable in the run-up to the ballot, with the IMF projecting a real GDP growth rate of 4% and an inflation rate of less than 20% by 2027. 
• The Argentine government currently operates a crawling exchange rate peg, allowing the peso to depreciate 2% per month, while monthly inflation is running at around 4%, leading to a continuous appreciation of the real exchange rate and a decline in export competitiveness, which limits dollar inflows via the current account.

While its short-term outlook is manageable, Argentina will struggle to overcome its susceptibility to recurrent economic instability and financial crises over the longer term. Unlike Brazil and Mexico, Latin America's other two large economies, Argentina has experienced recurring economic instability and financial crises over the past century. This is partially due to the fact that Brazil and Mexico have been able to implement institutional and economic reforms; Argentina, by contrast, lacks sufficiently robust economic governance, such as an independent central bank, due to its political system's inability to resolve domestic-distributional conflict. Indeed, for decades, successive Argentine governments have caved to popular demands for high public spending — resulting in large fiscal deficits and debt levels that have, in turn, left Argentina's central bank unable to control inflation, generally as a consequence of the government resorting to the monetary financing of its deficits. While Milei's election in 2023 suggests that a significant segment of the Argentine electorate currently supports fiscal discipline, whether this remains the case is by no means guaranteed — especially if inflation rebounds or if the economic recession brought on by Milei's reforms persists for longer than expected, thereby exacerbating rising poverty levels in Argentina. Against this backdrop, Argentina's 2025 mid-term legislative elections will prove key, as a strong performance by Milei's Libertarian Party — especially if it secures a legislative majority — could enable his administration to implement the wide-ranging, difficult-to-reverse institutional reforms needed to ensure the country's long-lasting economic and financial stability (such as an effective fiscal responsibility law or legislation that establishes central bank independence). If, however, the center-left opposition manages to expand its presence in Congress by exploiting social discontent with the economic fallout from Milei's pro-market reforms, the Argentine president will face even more legislative pushback, leaving little room for such structural changes.

• Both Brazil and Mexico underwent important reforms of their policy regimes, including the establishment of an independent, inflation-targeting central bank, a flexible exchange rate regime and a political or institutional (even constitutional) commitment to fiscal discipline. This has helped both economies absorb severe exogenous shocks, such as the dot-com bust in the late 1990s, the COVID-19 pandemic and, in Brazil's case, the 2002 election-related financial shock. By contrast, Argentina restructured its foreign debt in 2020 following a major default in 2001 and a selective default in 2016.