Argentina’s next political chapter: new President and a potential radical economic reform

On November 19, 2023, right-wing candidate Javier Milei was elected the new President of Argentina, defeating the current Economy Minister Sergio Massa with a record-breaking win of more votes than any other Argentinian president since 1983.  This is a significant development for the country, as Milei’s political platform consisted of proposals (the “Political Action Plan”) has been considered by the analysts and the media to be part of a dramatic political shift.

We discuss below Argentina’s new elected president’s Political Action Plan and how some of his proposals might shape the economic fundamentals in Argentina and the future of doing business in the country.

Milei’s Political Action Plan

Milei’s Political Party, La Libertad Avanza, published its Political Action Plan in June 2023.  This plan proposes an “integral reform” to be carried out in three stages.  The plan’s primary objective is to minimize the role of the government to the greatest extent possible, and to create an environment conducive to private investment.

• The first stage entails, among other strategies to boost Argentina’s economy, “a sharp cut in the State’s public spending and a tax reform aimed at lowering taxes, along with labour market flexibilization to stimulate job creation in the private sector and a unilateral opening to international trade.” This stage includes constructing ports, airports, and roads based on public-private partnerships.
• The second stage involves cutting down the State’s expenditures related to pensions and special benefits for former governmental employees, and instead promoting a private pension funds system. This stage would also involve reducing the number of Ministries and “social plans.”
• The third stage encompasses reforms to the public healthcare and education systems, with a shift towards incentivizing private alternatives. This stage also involves “eliminating” the Argentinian Central Bank, which is currently dependent on the Argentinian Government.

Key Proposals and Future Challenges

Within the framework of his Political Action Plan, Milei has made several statements regarding concrete proposals that he aims to implement during his tenure.  According to economic analysts, Milei's policy model appears to be well-aligned with shock therapy, both in fiscal and monetary terms.  We analyze some of these proposals below.

Privatizations of state-owned companies

A day after his election as president, Milei confirmed his intention to privatize Argentinian state-run oil companies YPF and ENARSA.  He further stated that “everything that can be in the hands of the private sector will be in the hands of the private sector.”  However, Milei has not yet specified the details of how and when this privatization would occur, and has stated in relation to YPF that his administration would need to “rebuild” it before it can be privatized.

Milei also confirmed that he intends to privatize Argentinian state-owned media companies Télam, Radio Nacional and TV Pública.

The “Chainsaw Plan”

As outlined in his Political Action Plan, Milei has stated his intention to drastically cut government expenses, eliminate public subsidies and “break up with the status quo,” as part of what he calls the “Chainsaw Plan.”  This plan includes cutting thirteen points of public spending within a year and “blow[ing] up” the Central Bank to prevent it from printing more money and control inflation.  According to Milei, the closure of the Argentinian Central Bank “is a moral obligation.”

Milei has also explained that “[i]n conceptual terms, the central axis is to close the Central Bank, and subsequently, the currency (will be) whichever one Argentines choose freely,” referring to his dollarization plan.

Argentina’s International Relations Moving Forward

Initially, Milei stated that he “won't make deals with communists” in China or Brazil.  Diana Mondino, who Milei confirmed will be appointed as the Ministry of Foreign Affairs, declared that Argentina will cease making “opaque state-to-state-deals” with China.

Despite Milei’s statements, a day after the elections, the spokesperson for China's foreign ministry expressed they "stand ready to work with the Argentine side to continue our friendship, boost our respective development and revitalization with win-win cooperation, and promote the steady and long-term development of China-Argentina relations."  The details of Milei’s plans for Argentina’s commercials relations with China are yet to be determined.  In any case, Argentina must remain compliant of its obligations under existing contracts with Chinese entities, and under international law, including the 1992 Bilateral Investment Treaty between Argentina and China.

By contrast, Brazil’s President Lula da Silva decided to put relations between Brazil and Argentina on hold until he has clarity about the incoming administration’s plan.

The head of the International Monetary Fund (“IMF”) also referred to Milei’s election and stated that the IMF “look[ed] forward to working closely with him and his administration in the period ahead to develop and implement a strong plan to safeguard macroeconomic stability and strengthen inclusive growth for all Argentinians.”  In March 2023, the IMF Executive Board approved a 30-month US$ 44 billion loan program for Argentina.

Another significant aspect during Milei's presidential campaign was his stance on the Islas Malvinas. Although he has stated that “The Malvinas (Falkland) Islands are Argentine, and sovereignty [is] non-negotiable”, he advocates for reaching a solution through diplomacy, citing as an example the resolution of the dispute over Hong Kong between China and the United Kingdom, where “through diplomacy a solution was reached and the English returned the enclave.”  Milei’s position on the Malvinas’ issue has created the expectation that “[t]here is . . . some hope that attempts at commercially viable oil and gas exploration in the Falkland Islands . . . could be more conducive and cordial.”

Main takeaways

It is too early to predict where Argentina is heading to in the coming years.  Whether the Argentinian Congress supports Milei’s proposals will be crucial in determining how far he will get in implementing them.  Currently, La Libertad Avanza holds a relatively small share of seats in the lower house and the senate.  However, some analysts believe that his resounding election victory could potentially provide him with leverage, especially if he seeks support from members of the center-right wing who backed him in the election's second round.

In any case, the new regime of President-elect Milei will be crucial in shaping the future of doing business in Argentina.

We will continue to monitor developments in Argentina and encourage you to subscribe to be kept informed of the latest developments.  Please contact the authors or your usual Herbert Smith Freehills contacts for more information.