A humiliating election defeat is forcing Argentine President Javier Milei to face up to a series of political miscalculations — chief among them, his reliance on his beloved sister.

The president’s libertarian party got just 34% of votes in Sunday’s local elections in Buenos Aires province, to 47% for Peronism, its main rival. While the area has long been a stronghold for the leftist party, Milei had anticipated a closer result.

The rout showed the limitations of a campaign built on attacks on the previous government, which left office nearly two years ago. It also shocked investors since a similar drubbing in crucial mid-terms next month could sink Milei’s free-market revolution altogether.

One of his biggest challenges will be to rethink the role of Karina Milei, a top aide who the president describes as “el jefe,” or the boss of his government. Now she has become perhaps his biggest liability with a double responsibility for Sunday’s fiasco: firstly, by designing the electoral strategy that failed to persuade voters, and, secondly, by herself becoming embroiled in a graft scandal that exploded just two weeks ahead of the vote.

Much of Milei’s popularity comes from his success in taming inflation and bringing some stability to the economy, so chaos in financial markets is an additional threat to his government. The official peso plunged as much as 7% when local markets opened, before paring some of those losses, while the nation’s dollar bonds posted the biggest declines in emerging markets.

In a contrite speech after his defeat, Milei said he won’t budge from his tough austerity and strong peso policies, but pledged a period of reflection and “deep self-critique” ahead of the October vote that will renew nearly half of Argentina’s congress. He didn’t elaborate, but any overhaul of his political strategy will inevitably involve his younger sibling.

“Milei has to put on his adult pants and take charge of his government’s politics,” said Alejandro Catterberg, director of political consulting firm Poliarquia. “He has to lead the political decisions himself and break the delegation he has handed over to his sister.”

On Monday, Milei convened his top advisers to two separate meetings to discuss changes to his political messaging, according to two people familiar with his agenda. He isn’t planning to fire any cabinet ministers, according to two government officials close to Milei who asked not to be named since the conversations were private. So far, the government has only created a working group to address the crisis.

Bribery allegations

The bribery allegations were particularly damaging since Milei had promised to clean up the corruption that has plagued the country. The government has denied wrongdoing, but hasn’t yet given a full account of Karina Milei’s behavior.

Last month, local media published leaked audio messages in which the head of the national disability agency, who has since been fired, described alleged kickbacks on pharmaceutical purchases benefiting Karina Milei. A judge later blocked audio of her from being released.

Karina consolidated power after Milei became president, becoming his gatekeeper with control over his agenda even though she had no political experience. In recent months, she’s clashed with the president’s strategist, Santiago Caputo, who had sought alliances with centrist parties, and wanted to add members of his own communications team to the list of candidates.

Karina allied with the center-right PRO party of former president Mauricio Macri, but gave them little decision-making power, thereby losing access to their political machinery, while other centrists launched a third-way party. The government was disappointed by its failure to win over PRO supporters, according to a person familiar with the discussions.

Spokesman Manuel Adorni said that the president will now preside over a political decision-making body that includes his sister and other cabinet members, indicating that there are no immediate plans to drop Karina from the administration.

Industry shrinks

Government officials blamed the loss on low turnout, which was below 63% among 14 million registered voters, as well as on their rivals’ success in using their party machinery to mobilize their own vote in their traditional strongholds. Analysts don’t expect these same conditions to be repeated in the nationwide vote in October, given higher participation in national elections.

Annual inflation slowed to 37% in July, from a peak of nearly 300% last year. However, economic growth has stalled, and the jobless rate has risen. Industrial output shrank month-on-month for the fourth time this year in July, as Milei’s strong peso policy took a toll on manufacturers, who are especially concentrated in the province of Buenos Aires.

“When the economic situation is complicated, and on top of that there are alleged acts of corruption, that’s a deadly combination,” said Mariel Fornoni, from polling firm Management and Fit. “People won’t let that slide.”

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