Argentina: to the winner the spoilt economy

This year’s presidential election in Argentina is likely to be the first to be decided in a second and final round of voting since the constitution was changed in the 1990s. The outcome for the country – and its economy – will be as important as it will likely be close. Euromoney talks to economic advisers to the two leading candidates about how they view 2016 and beyond.

Argentina is on the brink: on the brink of a presidential election; on the brink of a hugely important choice; and quite possibly on the brink of economic and financial chaos – whoever wins.

The August primaries – effectively a large national opinion poll for the two leading candidates – showed how successful short-term economic policy has been in creating breathing space for the ‘stability’ candidate, Daniel Scioli. He won the primaries, with 38.4%, 8.3 percentage points ahead of the combined votes for the opposition Cambiemos candidates, of which Mauricio Macri becomes the official candidate in the first round of the presidential election in October.

Polling from Ipsos in July showed that Macri has a projected second round share of the vote of 49.1%, versus Scioli’s 45.5%, but that vote is on November 22 – still some time away – and the outcome is too close to call. (A second round will be necessary if no candidate gets 45% of the vote, or 40% and a 10 percentage point lead; third placed candidate Sergio Massa’s 14.2% showing in the primary is likely to lead to a run-off poll.)

Scioli’s strong showing has been on the back of a relative improvement in the Argentine economy. As such, the crucial third of voters that are neither pro-change nor pro-continuity Peronists have been inclined to view his candidacy more favourably. A statistic from a recent IIF report cites a public opinion poll that says that while two-thirds of the population disapproves of current economic policies, less than half favours substantial changes.

Current policy has created the space for a mini-economic revival and hence Scioli’s stronger showing. The key question is whether or not this policy – which favours short-term stability at the expense of exacerbating longer-term imbalances (heightening the day of reckoning for whoever wins) – will unravel before the elections.

The Kirchner government has managed to bring inflation down from 40% to the monthly equivalent of about 25% a year through foreign exchange controls and increasing external financing and currency reserves through unorthodox channels, such as Chinese loans and delaying import payments and profit repatriation.

The government is using foreign exchange stability as the main inflation anchor – supported to a lesser extent by a slight inflation anchor from fiscal subsidies to transport and energy – while increasing its fiscal spend ahead of elections to regions of core support. The end result has been growth in its primary deficit, which is now over 6%. It is also rapidly expanding the monetary base, so the short-term reduction in inflation is building up strong inflationary forces that will need to be dealt with by the next president.

Mauro Roca, economist at Goldman Sachs, notes: “The current policy mix cannot be sustained for long due to its intrinsic inconsistencies. The disproportionate increase in liquidity amid rising currency misalignment and relative price distortions pose a significant threat to the medium-term inflation outlook. The next administration will be pressured to exit stagflation while facing a more serious inflation-activity trade off. In our view, rather than continue decelerating, inflation is poised to resume an increasing trend.”

Viewed through a political lens, the strategy is working: consumer confidence has been steadily increasing in the past few months and has reached a three-year high. Ironically, this revival in spirits is boosting the short-term domestic outlook while electors remain largely unaware of the future costs. Exchange-rate pressure was also eased through a parallel international dynamic: foreign investor sentiment improved as they viewed any change in administration as a positive, lessening external exchange rate pressure – but this is waning as Scioli increasingly aligns with the Kirchner model.

For the full article visit Euromoney Magazine

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