Voters will have the last word in October, but whoever wins the election will face the same narrowing policy choices and even less room to improvise than Macri.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for 'Newsweek' and is the author of 'The Last New World: The Conquest of the Amazon Frontier.'
Former president Cristina Fernández de Kirchner has always kept one foot on the balcony and the other on Mercury. In her volatile two terms in office, she picked fights with agribusiness, the International Monetary Fund, the Clarín media empire, even screen idol Ricardo Darín, leaving Argentines the worse for her convulsions. Now, just in time for national elections, the willful Peronist is back again sowing disruption.
Fernández de Kirchner was expected to stage a political comeback by challenging incumbent President Mauricio Macri, who after a bruising fiscal retrenchment is struggling with mounting debt and inflation, and sagging approval ratings. Instead, she startled loyalists and rivals alike by announcing her candidacy for vice-president, on a ticket led by her former Cabinet chief and later harsh critic Alberto Fernandez, who is not related. The manoeuvre rattled the political establishment and the excitable Argentine news cycle. Was Fernández de Kirchner caving to the reality that she is too divisive a figure to return to the presidency? Was this a sleight of hand, with her playing Vladimir Putin to Alberto Fernández’s Dmitry Medvedev? Or was it all an attempt to distract Argentines from her legal woes—her trial on serial corruption charges began May 21—just months before the balloting?
Voters will have the last word in October, but whoever wins the election will face the same narrowing policy choices and even less room to improvise than Macri. Although a projected record harvest pumps hope into the feeble economy, the country’s gross domestic product shrank 2.5 percent in 2018 and is down 6.8 percent from a year ago. Investor reticence has undermined the peso, which lost half its value in 2018 and remains one of the most vulnerable currencies in emerging markets, according to Oxford Economics. In a land in thrall to the dollar, a weakened peso stokes inflation, now topping a wage-melting 50 percent.
Argentina’s relapse has been remarkable. Just two years ago, the US$637-billion economy looked to be on the mend from a decade and a half of misgovernment under the vaporous Kirchners (Néstor, from 2003 to 2007, then his wife Cristina from 2007-2015), who turned South America’s second largest market into an international financial pariah. Having settled terms with angry bondholders—or debt "vultures," as Fernández de Kirchner called them — Macri lifted currency controls and parlayed the country’s new aura into credibility and hard currency loans: In mid 2017 he successfully floated a “century bond” with an unheard-of 100-year maturity. Investors piled in and Argentina looked to be on track to morph into “a normal country,” in Macri’s words. It didn’t.
A record drought in the grain belt took its toll in 2018. So did unforced errors, such as ill-advised monetary policy (the Central Bank lowered interest rates even as high inflation persisted) and botched communications by the Macri government. Enter the talk of a US-China trade war, rising US interest rates and an emerging markets sell-off. By early this year, the storied century bonds had become the stuff of memes.
Part of the blame may lie with the IMF, which in six decades has struck 22 agreements with Argentina, most of them ending in routs. Last year’s US$50-billion deal was the largest country loan the IMF has ever given; when even that failed to reassure creditors, the IMF added on another US$7 billion. Macri might have used that nest egg to retire debt or build up hard currency reserves; instead, he bought pesos, former IMF executive director Héctor Torres, now senior fellow with the Centre for International Governance Innovation’s International Law Research Program, recently wrote.
Officially, the IMF frowns on countries diverting loans to rescue tanking currencies, but Argentina’s serial crashes have defied the orthodoxy. “The IMF should really have allowed this all along if it was going into the business of saving Argentina from itself,” said Monica de Bolle, director of the Latin American programme at Johns Hopkins University’s School of Advanced International Studies. “With a highly dollarised economy like Argentina’s, there's really nothing else for the Fund to do if it wants to stay engaged, and at this point, staying engaged is a must because of the political fallout for the institution.”
Argentina is down but hasn’t returned to the serial crises of the recent past. Macri’s belated fiscal containment is expected to ease gross government debt (from 79 percent of GDP to 70 percent by 2020) and possibly eliminate the primary deficit this year, according to Oxford Economics. And while much has been said of Macri’s blunders, he’s won plaudits for eschewing populist feel-good measures by keeping money tight and hewing to budget cuts. Anchored by the revised IMF rescue package, the economic slump is expected eventually to turn.
Yet continued austerity spells no imminent relief for crisis-weary Argentines, who have seen unemployment spike to 9% and borrowing rates that the Economist Intelligence Unit called “cripplingly high.” “It’s like taking antibiotics,” said Goldman Sachs senior economist Alberto Ramos. “Eventually the fiscal measures will kick in but it’s hard to see that in the middle of a painful adjustment.”
Macri’s opponents count on leveraging that pain for advantage at the ballot box. Presidential campaigns are petri dishes for bombast and populist promises, but governing is another matter. Just ask Jair Bolsonaro, Brazil’s splenetic rightwing leader who despite a lackluster economy and five bruising months in office has yet to step off the campaign stump. “With the benefit of hindsight, we could say Macri ought to have moved more quickly to adjust the economy when he had the chance, and that by delaying, he’s made the adjustment more difficult,” economic historian Victor Bulmer-Thomas, Honorary Professor at the Institute of the Americas, University College London, told me. “But you have to distinguish between rhetoric and reality. The Peronists could gain electoral traction with harsh talk. Yet it’s difficult to see what they would do differently. There is no magic here.”
Argentina could do without magic. “Market sentiment is fragile. We’ve lost degrees of freedom to manage the economy,” said Ramos. “We don’t need radical policy change, just to continue down the road of fiscal consolidation.” That logic could revive Macri’s flagging fortunes or boost those of a credible centrist alternative. “This generation of Argentines is different. As much as they dislike the current situation, they remember the trauma of the 1980s debt crisis and currency rout, and they don’t want to go through that again,” said Bulmer-Thomas.
Hence the Peronist nod to Alberto Fernández, an electoral novice who nonetheless is known as a conciliator and policy pragmatist. “If he frames his candidacy as moderate, and the market believes he and not Cristina is in charge, and that his presidency will make Argentina a trustworthy borrower, you could get a happy ending for their ticket,” said Oxford Economics chief Latin America analyst Carlos de Sousa. “But that’s a lot of ifs.”