Argentina's Political Fractures and the Risks to Economic Reform Momentum

Argentina's economic transformation under President Javier Milei has captured global attention, marked by aggressive free-market reforms, a dramatic reduction in inflation, and a surge in investor optimism. Yet, beneath the surface of this apparent revival lies a growing undercurrent of political instability. Internal divisions within Milei's administration-exemplified by the sidelining of key allies like former President Mauricio Macri and the centralization of power-pose significant risks to the sustainability of Argentina's reform agenda and the confidence of foreign investors.

Political Fractures and Governance Risks

The Milei administration's early months were defined by a bold shock-therapy approach: devaluing the peso, slashing public spending, and dismantling state controls. These measures, while economically transformative, have come at the cost of political cohesion. The sudden resignations of Cabinet Chief Guillermo Francos and Interior Minister Lisandro Catalán in late 2025, coupled with the consolidation of authority in Presidential Secretary Karina Milei and advisor Santiago Caputo, signal a shift toward centralized governance, according to a Mercopress report. This concentration of power, while enabling swift decision-making, risks alienating potential allies and eroding institutional checks and balances.

Milei's private dinner with Macri-a pivotal moment in late 2025-highlighted both collaboration and tension. While discussions on "second-generation reforms" (targeting labor, tax, and social security systems) underscored shared economic goals, Macri's public criticism of Milei's cabinet appointments revealed deepening fissures, Bloomberg reported. These divisions are not merely symbolic; they reflect a broader ideological and strategic divergence. Macri's PRO party, once a centrist force, has seen seven lawmakers defect to Milei's La Libertad Avanza (LLA), signaling a realignment in Congress. However, this shift also raises questions about the durability of cross-party alliances, which are critical for passing structural reforms.

Centralization and Investor Sentiment

The centralization of power under Milei has had mixed implications for investor confidence. On one hand, his fiscal austerity measures-such as extending the 2023 budget for a second year and achieving a primary fiscal surplus-have stabilized Argentina's macroeconomic foundations, according to the Buenos Aires Times. Inflation, once a staggering 211.4% in 2023, fell to 31.8% by September 2025, while GDP growth reached 6.3% year-on-year, as reported by Forbes. These metrics, coupled with a $40 billion U.S. aid package and a Moody's credit rating upgrade, have attracted foreign capital, with the Argentine peso rising nearly 10% against the dollar, Forbes noted.

Yet, the same centralization that enabled these gains also introduces governance risks. Critics argue that Milei's unilateral budget extensions and bypassing of congressional oversight have created a "petty monarch" dynamic, undermining transparency, the Buenos Aires Times argued. For investors, this raises concerns about policy continuity and the potential for abrupt shifts in economic strategy. A Bloomberg analysis notes that while Milei's reforms have restored fiscal credibility, the lack of institutional safeguards could deter long-term investment if political instability persists.

The Sustainability of Reforms

The midterm election victory in October 2025-where Milei's LLA party secured 41% of the vote-has provided a legislative mandate to advance structural reforms, according to a Vizionapi analysis. These include modernizing Argentina's archaic labor laws, reducing the tax burden, and privatizing state-owned enterprises. However, the sustainability of these reforms hinges on navigating internal divisions. For instance, while the Régimen de Incentivos para Grandes Inversiones (RIGI) program offers 30-year tax concessions to attract foreign investment in energy and lithium sectors, its success depends on maintaining political unity.

A critical test will be the implementation of labor reforms, which aim to reduce informality by lowering hiring costs. Yet, if internal factions within LLA or opposition from Peronists delay these measures, Argentina risks losing momentum. An analysis warns that without sustained fiscal discipline and bipartisan support, the gains from shock therapy could unravel, particularly if inflation resurges or public protests intensify, according to a myind analysis.

Geopolitical and Structural Challenges

Argentina's economic revival is also intertwined with geopolitical dynamics. The $40 billion U.S. aid package, contingent on Milei's electoral success, underscores Washington's strategic interest in countering Chinese influence in Latin America, as earlier analysis noted. However, this dependency introduces vulnerabilities. If U.S. support wanes due to political instability or policy reversals, Argentina could face renewed capital flight.

Moreover, structural challenges persist. Despite a 31.6% poverty rate in 2025 (down from 52.9% in 2023), austerity measures have triggered social unrest, Forbes reported. Balancing fiscal discipline with social cohesion will be a delicate act, particularly as Milei's reforms disproportionately affect lower-income groups.

Conclusion

Argentina's economic transformation under Milei represents a remarkable turnaround, but its long-term success depends on navigating political fractures and governance risks. While the centralization of power has enabled swift action, it also creates fragility. Investors must weigh the short-term gains against the potential for policy instability, particularly as internal divisions and external pressures evolve. For Argentina to solidify its path from crisis to opportunity, Milei's administration must demonstrate that it can reconcile ideological differences and institutionalize reforms-without sacrificing the very stability that has drawn global attention.