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Old Medicine for New Crises in Argentina Election

Stockholm (Ekonamik) – Market-friendly President Mauricio Macri lost his re-election bid Sunday to the centre-left candidate Alberto Fernández and his running mate, former President Cristina Fernández de Kirchner, with 48% to 40.5% with 95% reporting at approximately 3.30 AM GMT+1.

The election victory for the Fernández ticket was a resounding rejection of Mr Macri’s austerity politics. Clearing the 45% hurdle was enough to secure a first round victory, and the crushing defeat for Mr Macri  follows an embarrassing primary defeat in August to the same ticket that sent Argentina’s currency and stock markets crashing.

Ms Fernández de Kirchner – who is not related to Mr Fernández – and her husband Néstor Kirchner headed Argentina’s presidency from 2003 to 2015. Mr Kirchner died in 2009, but the couple are credited with leading Argentina’s recovery from economic collapse and another monumental foreign debt default in 2001-2002.

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Markets have since August been pricing in the almost-certain Fernández victory, but uncertainty surrounding how Mr Fernández would reverse the downward spiral of Argentina’s free-falling economy and restore investor confidence is likely to spike volatility in Argentina’s fragile capital markets in the days and weeks ahead.

Mr Fernández, however, has yet to elucidate an exact economic programme to deal with the current crisis, and what he says and who he appoints to his cabinet will be watched closely by investors. He has promised to improve wages and benefits for workers and pensioners while respecting the $57 billion loan Mr Macri took from the IMF last year.

Investors fear that the Fernández ticket will nevertheless attempt to renegotiate Argentina’s debts with the IMF, following two rounds of debt restructuring in the 2005 and 2010 and debt defaults in 2001 and 2014 when Ms Fernández de Kirchner previously held office. Argentina has $15.9 billion in foreign-currency debt due this year, with another $18.6 billion in bond principal, loans and interest payments. 80% of Argentina’s debt is in foreign currency.

Inflation has surged to 53.5% in September (from 25% in January 2018), while Mr Macri’s administration removed important state subsidies, causing the Argentinian economy to contract and the peso to lose over 200% versus the U.S. dollar since January 2018, falling by 37% in 2019 alone. Mr Macri had tried to defend the peso by raising rates, which instead led to a spike in government debt. A flight of capital followed his loss in August that cut Argentina’s foreign exchange reserves from $80 billion to $48 billion.

Argentina’s crisis besides, some analysts believe Argentina’s crisis and fears about the new government may not have a deep impact on broader Latin American markets. “Even if Peronists sweep to power in Argentina again, and protests rumble on elsewhere, there are reasons to think that the MSCI Latin America Index as a whole will hold up better than some of its regional peers in the next year or so,” according to Oliver Jones, Senior Markets Economist at Capital Economics.

The MSCI Emerging Markets Latin America index is up 9.2% in 2019 so far and was up 3% this week alone despite concerns about Argentina’s election, mass protests in Chile and Bolivia and looming unrest in Ecuador following the breakdown of talks to end anti-austerity demonstrations there as well, Mr Jones wrote in a note. But Bolivia and Ecuador are not included in that index at all, while Mexico and Brazil make up the lion’s share. Argentina’s accounts for just 2%.

However, “as far as the outlook is concerned, we think that there could be yet more pain to come for Argentine assets following a Fernández-Fernández victory in the election,” Mr Jones writes.

Meanwhile, the resounding Fernández ticket victory in the first round could save the country from even more pain in having to wait for a second-round runoff, which would have been held on November 24. Markets and investors will be spared from having to wait even longer for a clear message from Mr Fernández, who will now be under pressure to deliver a clear economic direction immediately. He will also need to consult with investors on restructuring the sovereign debt, and restart IMF negotiations.

President-elect Fernández will assume office on December 10. Who will actually be in charge between he and his running mate, though, is another matter.

Image: Augusto Starita / Ministerio de Cultura de la Nación (Wikimedia Commons)

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Glenn W. Leaper, PhD
Glenn W. Leaper, Politics Editor, is a political theorist, analyst, editor and writer. He completed his Ph.D. in Political Philosophy and Critical Theory from Royal Holloway, University of London in 2015. His research focuses on ideology, unaccountable structures of power and surveillance capitalism. He is also a communications consultant, speechwriter, interpreter and journalist. Glenn has an international background spanning the UK, France, Austria, Spain, Belgium and his native Denmark. He holds an MA in Literature and a BA in International Relations.

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