Will Argentina’s Governors Stymie Milei’s Agenda?

Ignacio Torres, the governor of Argentina’s Chubut province, has clashed with the country’s president. Such tensions could hinder the national government’s agenda.

Argentina’s government announced last month that it had withheld the transfer of around $16 million in funds to the province of Chubut, due to debts accumulated by the state government. In response, Ignacio Torres, the governor of Chubut—which is Argentina’s second-largest oil producing and third-largest gas producing region—threatened to cut off energy
supplies if the funds were not disbursed. Other state governments have made similar threats, sparking a struggle between provincial leaders and President Javier Milei. Will the power struggle between Milei and local leaders continue to escalate, and could state governors follow through on threats to cut off supplies from their regions? Between the Argentine government and the provincial governments, which stands to lose more from the power struggle over funding? To what extent does Milei need the support and compliance of local leaders to pursue his policy agenda?

Mariano Machado, senior Americas analyst at Verisk Maplecroft: “For the past 100 days, Argentina has navigated uncharted political territory, with a far-right, populist outsider president lacking executive experience, political machinery and any willingness to negotiate swaths of structural reforms. This unresolved political disorder serves as the context for the spat between President Milei and the Patagonian provinces, in which both stand to lose. These provinces provide 98 percent of the gas, 87 percent of the oil, 71 percent of the wind power and 27 percent of the hydropower the country uses, so any threat is not taken lightly. But the likelihood of the provinces hitting the brakes on energy production is slim to none. Legally, resources belong to the provinces, but the chaos any supply cuts would unleash on the energy supply chain is enough to give anyone pause. Plus, private players aren’t exactly chomping at the bit to dive into the mess. For Milei’s administration, what is at stake is the ability to drive meaningful reforms through Congress.For that, he needs governors to steer their closely allied lawmakers in favor of his priorities–something he hasn’t achieved yet. So administrative skirmishes could continue, especially if ongoing negotiations fail. Both sides stand to lose, so rounds of talks with all 24 governors will continue in the coming weeks, seeking an overarching legislative agreement in the run-up to the so-called ‘Pact of May’–a broad, forward-looking shopping list to boost economic liberalization. However, given differences in style and each stakeholder’s assessment of their leverage in the conversation, the result remains wide open.”

Bruno Binetti, nonresident research fellow with the office of the president at the Inter-American Dialogue: “The public and quite childish dispute between President Milei and Governor Torres is a symptom of a broader problem. More than 100 days after taking office as president, Milei has not been able to build a working relationship with Argentina’s governors, none of whom belong to his party. Among the reasons are Milei’s inexperience, his zero-sum view of politics and the fact that his program of drastic fiscal consolidation depends on cutting federal transfers to provincial coffers. In turn, distrust between the president and the governors helps explain why Milei has not been able to pass a single law through Congress. Even if some provinces rely on national funds to stay afloat, governors hold sway over national legislators, especially in the Senate. In essence, Milei must reconcile his outsider identity and his political weakness. The traditional way to resolve the impasse would be to negotiate extra funds for the provinces in exchange for legislative backing
for some of the president’s pro-market reforms. But Milei is not a traditional president. Although he and the governors need each other, and there is room for accommodation, the volatile libertarian might decide to terminate ongoing talks and attempt to govern without the provinces and, therefore, without Congress. If open conflict erupts, the consequences for the sustainability of Milei’s economic program, and for his presidency more broadly, could be serious.”

Carolina Caballero, associate director at S&P Global: “Argentina’s shock therapy strategy for fiscal consolidation has direct implications for provincial budgets and has increased tensions with governors. The planned 5 percent of GDP adjustment includes 0.5 percent to 1 percent of GDP transfer cuts for provinces. Discretionary funds, money for education payrolls and provincial pension deficits, are being reduced. The sharp cut comes on top of the reduction in personal income tax–one of the main taxes that is shared under the co-participation law with provinces–that was approved last September 2023, which, coupled with the recession, is eroding provincial revenues. The depreciation in the exchange rate is putting pressure on debt service payments, while borrowing from the national government will be limited. These pressures will lead to deterioration in provincial finances this year. Our CCC/stable ratings for all subnational governments in Argentina underscore high vulnerabilities. However, some provinces that accumulated buffers in the recent past are in a better position to try to avoid a liquidity crisis. Provinces with a balanced fiscal position, less reliance on national government transfers and accumulated liquidity are in a better position to deal with the challenging scenario. Debt management as well as reputation in the local market also become very relevant to fill the gap that intergovernmental financing used to play. However, escalation of the conflict between different levels of government, like the threats of limiting exports–although it is unclear how they would be implemented–and questioning credit guarantees, create noise that could hinder fiscal improvements and could damage market confidence.”

Nicolás Saldías, senior analyst for Latin America and the Caribbean at the Economist Intelligence Unit: “Relations between President Milei and Argentina’s governors have been tense as the provinces are bearing the brunt of his front-loaded fiscal consolidation policies. In February, real currency transfers to the provinces declined by a whopping 86 percent from year-earlier levels, while capital transfers have declined by 98 percent. Apart from budget cuts, this is also caused by the fall in taxes collected that are shared with provinces, like income taxes. In the latter case, this is a result of the previous government’s populist tax policies (which Milei supported) that led to an income tax cut that is depriving the provinces of revenue. The government’s unwillingness to share access to other taxes, which currently go directly to the treasury, is a major sticking point. Furthermore, the government’s cutting of funding to 87 percent of ongoing infrastructure projects is also hitting the provinces hard, which rely on public works projects for employment. Milei’s proposed privatization of firms is another area of tension, as the potential closure of these firms could disproportionately affect smaller provinces’ economies. Milei has also personally attacked governors who have defied him, which has added fuel to the fire. The political consequences of these tensions were highlighted with the defeat of the mega-decree in the Senate, where governors hold sway. Milei’s proposed ‘Pact of May’ with governors could provide buy-in for his policies, but he will have to negotiate in good faith. But, so far, his hardline views and anti-establishment rhetoric have stalled progress.”

Julio Burdman, professor at the University of Buenos Aires: “The power struggle between Milei and local leaders will continue to escalate. For Milei, Argentina’s central problem is fiscal. He does not want to just equalize the public’s accounts: he wants to reduce the size of the state. That implies getting involved in provincial expenditures. Milei wants the provinces to spend less. The 10 provinces of the Norte Grande region stand to lose the most. The provinces of Buenos Aires, the Central Region (Córdoba, Santa Fe) and Patagonia have other alternatives to confront the financial de-escalation. But the ones in the north depend greatly on federal resources. Milei needs the support and compliance of local leaders to pursue his policy agenda. He faces a dilemma: adjustment or governability. He can make adjustments alone, but to approve laws he needs the support of the governors, who demand that he does not adjust the fiscal policy that much. The president must decide if fiscal adjustments will take place in exchange for the support of local leaders.”

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