Markets reacted with alarm to Peronism’s unexpected landslide victory in Buenos Aires. Now, President Javier Milei is facing myriad economic challenges ahead of October’s national elections.

The opposition won by 13 percentage points, a far wider margin than expected. The exchange rate and country risk index soared the next day, while bonds and stocks tanked. Markets are doing the math and, if the administration keeps burning through its dollar reserves, it will not have enough to cover its upcoming maturities.

“The magnitude of the defeat came as a surprise. This is reflected in the pressure on the exchange rate, which today is once again the most sensitive indicator of local risk,” Pablo Lazzati, CEO of Insider Finance consultancy, told the Herald.

“The expectation is that exchange rate volatility will remain high following the opposition’s victory.”

In April, after securing a US$20 billion loan from the International Monetary Fund, the government allowed the peso to float freely between two bands. The Central Bank can only sell dollars to defend the peso if the exchange rate hits the upper band, which is currently around AR$1,470.

However, last week, the Finance Secretary announced that the Treasury would start intervening in the exchange market after the peso weakened against the dollar — even though the U.S. dollar had not reached the band’s ceiling.

The market estimates that the Treasury only holds US$1.1 billion. A report by consultancy 1816 consultancy said that the treasury faces maturities of US$1.1 billion ahead of the October 26 national midterm elections, meaning it has “extremely limited” capacity to keep stepping into the market.

If the exchange rate hits the upper band, on the other hand, the Central Bank could intervene with up to US$20 billion.

Argentina’s cooling economy

The report added that the devaluation’s impact on prices (known as pass-through) in July and August has been “very moderate,” with 1.9% inflation in both months. Analysts said that the economic cooldown is also holding back inflation.

Argentina is not in a recession, according to the latest available data, but growth has been waning after a rebound in mid-2024. Quarterly growth was 3.9% in Q3 2024, 2% in Q4, and 0.8% in Q1 of 2025, official numbers show.

But, as dollars run out, the market is far from calm. Pablo Repetto, head of research at broker Aurum Valores, told the Herald that the administration should redesign the exchange rate and monetary system.

“What scares the market is that the monetary exchange rate system was already battered and bruised, in need of correction,” he said. “There was speculation that this would happen after the October elections, but the truth is that the impact of the election was much worse than expected, and a reset will probably be needed sooner rather than later.”

However, Milei said the government would “not budge a millimeter” in its economic program in response to the results.

The 1816 report said that, since Buenos Aires governor Axel Kicillof was “the big winner” in the elections, the market could “factor in a high probability of a return to power for left-wing Peronism.” It could also assign “probabilities to the emergence of a third alternative, more closely linked to the ‘centrist’ governors.”

A Kirchnerist comeback?

The administration has called the fear of Kirchnerism making a comeback “the Kuka risk,” a pejorative term for the political movement’s supporters.

Yet, Repetto says such a risk would have been much lower if the government hadn’t “made so many unforced errors from the second quarter until last week.”

The government was rocked by a scandal over kickbacks in exchange for disability medicines contracts in the weeks before the provincial vote. It has also faced a series of legislative defeats in Congress.

“The weight of Peronism in Buenos Aires province should come as no surprise to anyone,” he added.

On Wednesday, the government passed its first major post-electoral test as the latest bond auction ended with a 91.4% rollover rate. AR$7.4 trillion were maturing and AR$6.6 trillion were renewed, with interest rates easing. In previous bids, the administration had significantly increased the rates and banks’ reserve requirements, further freezing economic activity.