(Bloomberg Businessweek) -- Over the last 70 years, Argentina has endured hyperinflation, government collapse, and the world’s largest sovereign debt default. It’s spent a third of that time in recession, a record that almost deserves its own chapter in economic textbooks.
And yet even the embattled Buenos Aires stock exchange had never experienced anything like the 48% plunge it took on Aug. 12, a day after left-wing candidate Alberto Fernández bested the fiscally conservative incumbent Mauricio Macri in the presidential primary by more than 15 points, winning more than 47% of the vote. The primary is meant to winnow the slate of candidates, but in reality it serves as a nationwide poll to preview the official vote for the presidency, still 10 weeks away.
Macri will stay in the race, but investors and pundits consider his deficit in support too vast to make up. Fernández, meanwhile, is seen as a promoter of the same policies that have failed in Argentina for decades. The whiplash was too much for investors—poll numbers only days before the vote had showed the two candidates in a much closer race. “We have this long transition where it looks like Alberto Fernández is going to be the president, but he still has to be elected,” says Daniel Kerner, Eurasia Group managing director for Latin America. “With the market tanking and the government not knowing how to manage it—and actually playing on this fear—we are entering a very, very delicate situation in Argentina for the next several months.”
Macri was elected in 2015 with a mandate to fix the problems created by the preceding eight-year administration, which had doctored statistics, imposed limits on foreign capital, and kept public service bills artificially low, leading to a swollen deficit and an isolated country unable to borrow. He promised to eliminate poverty and attract a “deluge” of investments to South America’s second-largest economy. But after a cautious start that involved taking on tens of billions of dollars in international debt to paper over fiscal imbalances, Macri’s approval deteriorated, as did Argentina’s economy.
After the U.S. Federal Reserve raised interest rates in 2018, causing a steep slide in the peso, Macri was forced to negotiate a $56 billion bailout with the International Monetary Fund, the largest ever made with the lender. The agreement called for steep spending cuts and limits on liquidity to meet fiscal goals. The austerity measures did yet more harm to Macri’s standing with voters, who lost faith that his market-friendly approach would mend the battered economy. Annual inflation now sits above 50%, and the economy will contract in 2019 for a second straight year.
Fernández, for his part, seemingly emboldened by the support, sees no reason to change tack despite the extreme market reaction. The politician was a cabinet chief for the late Néstor Kirchner, president from 2003 to 2007; Fernández’s running mate, Cristina Fernández de Kirchner, was Néstor’s wife and successor. Her administration has been blamed for much of the mess Macri inherited.
Fernández has been vague about what his economic program would look like and elusive about how he might engage creditors, including the IMF. But he insists that only government change can calm the market. Macri, however, has pointed to the market collapse as an example for voters of what a return to the past might look like. “Blaming Kirchnerismo for market turbulence is a high-risk strategy,” says Nicholas Watson, a London-based Latin America analyst for Teneo, a management consultant. “Clearly, a large proportion of the electorate sees Macri as the problem, not the solution.”
Macri could force a runoff if he manages to claw back enough support from the front-runner and other lower-tier candidates before the official election on Oct. 27 to bring himself within 10 points of Fernández. As long as Fernández also receives less than 45% percent of the vote, there would be a runoff on Nov. 24—giving him more time to spin his comeback narrative. Still, he’ll have to rely on extraordinary turnout and likely reinvent his original campaign message, which has already started to drift left.
Many expected Cristina Kirchner to run for president, despite being embroiled in corruption probes dating to her time in office. She denies wrongdoing and has called the investigation political persecution. Her seat in the Senate, which she won in 2017, gives her legal immunity, though that could be stripped by a two-thirds vote of the upper chamber. As vice president, she would be head of the Senate, and by running in the No. 2 position, she’s able to stay out of the limelight’s harshest glare.
While the market has long feared another Kirchner administration—a poll in April showing her narrowly defeating Macri in a runoff sent bond prices into free fall—part of the extreme reaction to the primary result can be traced to a false sense of security created by pre-primary polling. Many of Argentina’s top pollsters shared their findings only with paying clients, including large investment firms, but a few that became public in the weeks leading up to the primary showed a close race. One showing Macri ahead by a point led to a small rally on the last trading day before the vote.
On the first trading day after the vote, Argentina’s so-called country risk gauge—the extra yield investors demand to hold government debt over U.S. Treasuries—surged to a 10-year-high, topping those of all other emerging markets, and its debt is now the costliest in the world to insure against default. Macri himself appeared shaken in his first public appearance, admitting he’d run a “bad election,” sheepishly vowing to stage a comeback, and lambasting pollsters for their errors.
Barring a miracle for Macri, Fernández will assume the presidency on Dec. 10. The president tweeted a few days after the vote that he and Fernández had talked and that the presumptive next leader “showed willingness to try to bring calm to markets.” What he inherits will depend more, though, on what he and his rival can do together in the interim to address default expectations, the real economy, inflation, savings, and any number of other factors that could sink the economy yet further. Markets are wary, but Argentines have long since grown accustomed to whiplash. Politics are “a seesaw that comes and goes,” says Ruben Haleblian, a 70-year-old vendor in an electronics store in downtown Buenos Aires. “I already lived it several times.”
To contact the authors of this story: Juan Pablo Spinetto in Mexico City at jspinetto@bloomberg.netDaniel Cancel in Sao Paulo at dcancel@bloomberg.net
To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net
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