Analysis-Argentina's Milei must look to alliances after electoral defeat

By Nicolás Misculin

BUENOS AIRES (Reuters) -A resounding electoral defeat for Argentine President Javier Milei in the country's most populous province could force him to build political alliances, casting doubts on the government's ability to carry out its program of fiscal austerity.

Sunday's Buenos Aires provincial election saw the center-left Peronists crush the ruling La Libertad Avanza party with 47% of the vote to a distant 33%, as voters sided with the socially focused opposition over Milei's strict austerity.

Buenos Aires' main stock index fell some 12% in afternoon trading on Monday, while the wholesale peso tumbled 5% and over-the-counter bonds slid 4%.

The vote in Buenos Aires province - which accounts for nearly 40% of the South American nation's total electorate - is widely seen as a bellwether for October's mid-term elections. Sunday's vote is, however, separate, deciding local legislative seats and not national-level representation. 

Although the province is a historic stronghold of the Peronist party, the scale of its victory raised doubts about the minority government's ability to reach a majority in Congress and pass laws to carry out its political agenda.

Although Milei's government has brought down inflation from triple digits since he entered office in December 2023, his popularity has been hit in recent weeks by corruption allegations and the impacts of his austerity measures, which have triggered regular protests in the capital.

Political analyst Andres Malamud said Milei would need to return to the strategy of his first year in office and focus on building political alliances to defend his program.

"To restore balance, Milei must do what he did in his first year: stabilize the economy and rebuild the coalition," he said.

"This completely changes expectations for October," added Mariel Fornoni, analyst at consulting firm Management & Fit.

Sunday's vote happened after Milei vetoed popular moves from the opposition to increase payments to pensioners and people with disabilities, and raise healthcare funding - measures he says would jeopardize the fiscal balance.

Federico Aurelio, who heads consulting firm Aresco, said the ability of Milei's party to govern would be determined by its ability to form alliances, especially with provincial governors.

If Milei is unable to reach deals with governors - many of whom are Peronists - to influence federal legislators from other parties to support the president's agenda, Aurelio warned that the government would struggle to pass its bills and reforms.

Milei's chief of staff, Guillermo Francos, has confirmed there will be a cabinet reshuffle starting in December, when newly elected deputies are set to take their seats in Congress.

"It is time for self-criticism, analysis, and seeing where we went wrong," he told local radio after the vote. "We need to see why the macroeconomic results are not reaching the people."

PERONISM REBORN

Axel Kicillof, governor of Buenos Aires province and a former economy minister under the administration of Cristina Fernandez de Kirchner, stood out as the victor in Sunday's election, boosting his chances of running for president in 2027.

"There is another path, and today we begin to walk it," Kicillof said at a rally on Sunday night.

Kicillof, however, faces opposition within his own Peronist coalition, notably from political heavyweight Fernandez de Kirchner, with whom he clashed over his push to hold the Buenos Aires election ahead of the national mid-term vote.

Political analyst Sergio Berensztein said Kicillof - who is more left-leaning than most Peronist governors - is unpopular with Peronists outside of Buenos Aires province, warning the win does not guarantee his candidacy in 2027.

Peronism, a broad political movement based on the ideology of Juan Domingo Peron and for many years dominated by the Kirchnerist faction, emphasizes social justice with substantial welfare programs and a strong economic role for the state.

"This is an important victory, but it may be a fleeting one for Peronism," Berensztein said, while analysts at Morgan Stanley predicted that uncertainty would remain high until the October 26 vote. 

(Reporting by Nicolas Misculin; Writing by Sarah Morland; Editing by Rod Nickel)