Pessimism is widespread as Argentine assets have fallen off a cliff, and the real question is how big a haircut will Argentina’s creditors have to face.
As always, Argentina could be the land of opportunity. It is evident that macroeconomic indicators are completely disrupted, as a consequence of President Mauricio Macri’s humiliating defeat in the PASO primaries at the hand of Alberto Fernández, a nobody whose good fortune landed him the leading role in former president Cristina Fernández de Kirchner’s ticket. Yet,the country’s fundamentals remain as strong as ever: a medium-sized population that is well-educated, a large national territory rich in natural resources, and an outdated infrastructure and industrial complex that just needs steady foreign direct investment in order to spring into action.
On December 3, 2015, I wrote my last article as a Forbes staff writer, titled “Be Wary Of Argentina’s Recovery: New President Mauricio Macri Is No Genius.” In that piece I explained that Macri inherited a nation that was absolutely broke, with a massive fiscal deficit, rising inflation, an unsustainable network of subsidies, locked out of capital markets, and under strict capital controls. Macri’s narrow electoral victory meant he would lead a minority government while living with the constant threat of massive street protests that could derail any attempt at austerity and reform.
At the time, the market was rallying and hedge funds were making a killing. Renewed optimism helped investors make billions as Macri was seen as the “slayer of populism.”
Today, the global market has demonstrated it truly has the power to impose conditions on weak nations like Argentina. The result of the PASO primaries exacerbated a series of imbalances that Macri never managed to fix, in part because of his own incompetence but also because of exogenous factors such as an historical drought and an emerging market crisis sparked by the Federal Reserve’s rate hikes.
Pessimism is widespread as Argentine assets have fallen off a cliff, and the real question is how big a haircut will Argentina’s creditors have to face. That, in turn, leads to analysing what stance the International Monetary Fund will take, and therefore what relationship a hypothetical ‘President Fernández’ will have with Donald Trump’s United States.
Alberto Fernández, of course, will win tomorrow’s elections. As it stands, Macri has no chance of even making it to the run-off, as the Fernández-Fernández ticket is expected to make gains on the 16-percentage point margin by which it defeated the incumbent and his running-mate, Senator Miguel Ángel Pichetto. Even if the stars align for the Juntos por el Cambio coalition and they somehow force a runoff, Macri’s disapproval ratings after such a disastrous management of the economy suggest he would still lose. Even worse, former economy minister Axel Kicillof could win the Buenos Aires Province — in “the mother of all battles” — with a record number of votes. María Eugenia Vidal, the province’s current governor, was supposed to be the ruling coalition’s ace of spades, but the electoral strength of the Fernández-Fernández coalition in the largest electoral district will be crucial in securing the victory.
In the PASO primaries, Cambiemos lost in every province with the exception of Córdoba, where its lead over the Peronists narrowed when compared to the 2015 election. Many within the ruling coalition still blame Cabinet Chief Marcos Peña and Ecuadorean advisor Jaime Durán Barba for not allowing Vidal to split the provincial election from the national bout. City Mayor Horacio Rodríguez Larreta, expected to gain re-election, could face a tough challenge from Matías Lammens of Alberto’s Frente de Todos. If Larreta’s election goes as expected, the City will be the nerve centre of the opposition to the pan-Peronist coalition that will lead the nation and the province from December 10 onwards.
The nervousness in Buenos Aires was palpable throughout the whole week, with long lines at banks in the downtown financial district as Argentines did what they generally do ahead of an election: grab their dollars. The black market rate surged, putting intense pressure on the official rate and forcing Central Bank Governor Guido Sandleris to sell reserves en masse to avoid an even stronger run on the peso. Many are predicting a catastrophe in financial markets on Monday, suggesting Sandleris and Finance Minister Hernán Lacunza will be forced to tighten capital controls. Alberto Fernández, if indeed president-elect, is expected to take a proactive role in calming the market, potentially unveiling his economic cabinet. There are doubts as to whether Macri will make it to December 10 given the rate at which the Central Bank is bleeding reserves.
Yet, once again the conditions are in place for Argentina to thrive, even if they don’t seem that obvious. Regardless of whether Alberto makes it to the Casa Rosada or not, whoever is in charge on December 11 needs to begin an immediate negotiation with the IMF, the US, and private creditors in order to restructure the debt as quickly as possible. While Macri is expected to end his term with a 0.9-percent primary deficit, the “fiscal drag” of pension payments — tied to inflation of the past six months — an expected loss of resources on behalf of the provinces due to the Federal Consolidation Agreement of 2016, and other costs including energy subsidies will push that number to 1.9 percent of GDP. All of these figures are based on estimates by economists Melisa Sala and Guido Lorenzo of economic consultancy LCG.
A plan needs to be put in place in order to cover that deficit without relying on monetary expansion, and this will require consensus with the opposition. Guaranteeing fair rules in Vaca Muerta is another priority everyone agrees on, except environmentalists who have a valid point. And it is imperative that in the midst of these corrections the government makes sure it is ensuring a safety net is in place for the most vulnerable people in society, given the pain that is set to come. As Latin America erupts into crisis, from Chile to Ecuador to Bolivia, the cost of inequality and exclusion is more explicit than ever.
As I’ve argued before, while Macri’s administration has been disastrous on economic terms, he’s done a few things right, and his true legacy could be constructed as the leader of a rational opposition that will not block legislation for the sake of political gain. Being part of the public debate in order to improve policy while supporting the Casa Rosada’s policies is similar to what Macri himself received from parts of the Peronist opposition in the early days of his mandate. If these things occur, it will be a tough 2020 but there are reasons to be optimistic for 2021.
In 2015 I wrote these lines, which, if we replace Macri for Alberto, are perfect for this moment: “Argentina, therefore, provides an incredible opportunity for investors. A nation swimming in natural resources with a well-educated population and a large domestic market in need of foreign direct investment. At the same time, it’s a country that has been in economic decline for decades due to an extremely complex socio-political dynamic that has eroded instutitions and fostered bureaucratic inefficiency and corruption. For the sake of everyone, let’s hope Macri is up to the task.”