Political Risk Analysis: What’s Next For Argentina?
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On October 28, 2019 voters in Argentina elected Alberto Fernandez, a political ally of controversial former President Cristina Fernandez de Kirchner, to replace Mauricio Macri, a business-friendly centrist, in the country’s executive office. The election marks a return to power for Argentina’s left and an uncertain path forward as the country still faces a number of long-term challenges.
On December 10 Fernandez will take over as Argentina’s president. Foreign investors are still waiting to see the details of his plans for catalyzing economic growth and addressing the country’s $330 billion debt burden. Fernandez will need to work to attract new investment while confronting Argentina’s debt problem and also tackling the issues of inflation, poverty, and corruption. Argentina still has the potential to encourage significant investment in electricity generation, e-commerce, and traditional sectors such as energy and agriculture. To get a sense of what’s ahead for Argentina I reached out to Jeffrey Lamoureux, a Head Americas Country Risk Analyst at Fitch Solutions.
Nathaniel Parish Flannery: What’s the significance of the recent election? Why did voters sour on Macri?
Lamoureux: Macri lost the election, first and foremost, because of the economy. He was elected as the market-friendly candidate, but through a combination of factors outside his control including drought, rising risk aversion as well as policy mistakes such as lowering the inflation targets and botched communications, particularly around the IMF. He lost market confidence. In Argentina, the economic and political narratives intertwined, as fear of the upcoming election worsened market pressures, in turn making it harder for Macri to get ahead of the political narrative and rebuild support. In the first half of 2019, the economy was 3.1% smaller than it had been in the same period in 2015.
The effect on consumers has been severe. In July, ahead of the primary, inflation was 54.4% y-o-y, while wages in the private sector were up only 34.7%, suggesting that household purchasing power was approximately 20.0% lower. Increases in utility tariffs compound the pain because for many people heavily subsidized utilities are not simply assumed to be a right, but seen as one of the few obvious ways the government helps them to get by. Macri’s approval rating fell net negative in 2018, and while approval polls ahead of the election became scarce, the Universidad Torcuato di Tella’s Indice de Confianza en el Gobierno shows that confidence in Macri’s government fell to near the 2014 lows of Kirchner’s second administration.
However, on the broader question of the election’s significance, there is a silver lining. Macri is the first democratically elected, non-Peronist president to serve a complete term in office. That he is leaving office in the midst of an economic crisis through a peaceful election and not via a helicopter from the roof of the Casa Rosada speaks to the relative health of Argentina’s democracy. He accepted defeat gracefully and by all accounts, the transition process is being handled professionally. He will transition to playing a leading role in an opposition that is set to be better organized and more powerful than his Peronist predecessors faced. This election could then represent an important point in the development of Argentina’s democracy, marking a shift toward a more competitive two-coalition dynamic.
Parish Flannery: What do we know so far about Fernandez’s policies?
Lamoureux: Until Fernández presents a cabinet and a more formal economic plan, we cannot know exactly what policies he will try to implement. In the broadest sense, we know that Fernández will seek to involve the government more heavily in the economy. He has consistently said he believes the path to recovery is through boosting consumption, and the lynchpin of his plan appears to be forging a “Pacto Social” between unions and industry to raise wages and slow price increases.
He has also spoken of the need to grow exports, which suggests he will try to support agribusiness, mining, and energy. Argentina’s export base remains small – goods exports totaled $61.6 billion in 2018, equal to just 14.4% of GDP – and dependent on the agricultural sector – 51.2% of goods exports in 2018 were from agribusinesses. However, none of these sectors are likely to deliver significant near-term growth given resource, infrastructure, and regulatory constraints. This underpins investors’ concern over the sustainability of the government’s external debt stock, which we forecast at $324.4 billion at end-2019, equal to 102.2% of GDP.
On the debt, he will seek a renegotiation, but the terms he is prepared to offer are far from clear. His initial claims that he would pursue a restructuring modeled on Uruguay’s efforts from 2003 were not credible, and it is widely believed he will need to secure significant debt relief.
The conversations surrounding his advisors also strongly suggest that his administration will utilise the Banco Central de la República Argentina as a primary tool of its policymaking, using it to manage the exchange rate, control capital flows and potentially finance government spending.
Parish Flannery: What are the most significant obstacles Argentina still has to confront?
Lamoureux: Fernández faces all of the same obstacles Macri faced: how to grow, contain inflation, establish fiscal sustainability, expand the export base. All of these stem from a fundamental lack of trust in the government’s ability to manage the economy and, by extension, the health of the financial system, which is visible in citizens’ reactions to the election. Between August 12 and October 25, the period between the presidential primary and the first-round election, the BCRA sold nearly $7.5 billion to meet the demand for dollars and slow the plunge in the peso. At the same time, between August 12 and November 12, US dollar deposits in the banking system fell $14.3 billion as savers, acutely sensitive to any suggestion of a potential crisis, rushed to take out their savings.
As Macri’s experience demonstrates, it is exceedingly difficult to achieve all of these goals at the same time, particularly given the unfavorable external circumstances of weakening global trade. Fernández, in particular, will struggle to prioritize and sequence his policy responses, because any choice he makes will create winners and losers within his own coalition.
For example, his “Pacto Social” will test his ability to manage the needs of the unions and the business lobbies, to say nothing of internal tensions between the major unions. Roughly, those distinctions will reflect on the tension between the Kirchnerist faction of the Peronist movement, and the more pragmatic factions, particularly the governors. More broadly, boosting spending will contribute to inflation and pressure on the peso; capital controls will discourage investment and further undermine domestic savers’ willingness to use the peso as a store of value; a drawn-out debt renegotiation will be particularly painful for provinces struggling with debt or with a large stock of US dollar debt. Santa Fe, which has 97% of its debt is in dollars, Córdoba, which has 95% of its debt in dollars, and Chubut come to mind here.
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