Argentina: Argentina faces runoff elections; FX reserves plummet on devaluation expectations
November 5, 2015
Argentina held presidential elections on 25 October and results point to no triumphant candidate, thus prolonging the uncertainty surrounding President Christina Fernández de Kirchner’s successor and putting more pressure on the country’s already unstable foreign exchange market. Daniel Scioli—the candidate from the ruling left-wing Front for Victory party (Frente para la Victoria, FPV), came in first with 36.9% of the vote. Nevertheless, this result was disappointing for the FPV as it was much worse than what was predicted in the pre-election opinion polls. Mauricio Macri—Scioli’s main opponent and the representative of the conservative Let’s Change (Cambiemos) coalition—performed considerably better than expected and garnered 34.5% of the vote. Another candidate, Sergio Massa from the United for a New Alternative party (UNA), got 21.0% of the vote and came in third. Since none of the candidates was able to pass the 45.0% threshold, a runoff between Scioli and Macri will be held on 22 November. No matter who wins, voters and investors are optimistic that the next president will reverse the current government’s interventionist policies, implement more market-friendly initiatives and resolve the holdout saga with the U.S. hedge funds.
The boost in popularity of the right-wing parties in the first round could point to a shift in the political landscape in Argentina following more than a decade of left-wing Peronist dominancy. In terms of economic policies, Scioli has promised a gradual shift from the current policies as a necessary step toward building a better business environment and a consolidated fiscal budget. On the other hand, Macri is campaigning for a faster change and pro-growth policies. Along with unwinding currency and trade controls, he is promising to reduce export taxes and restore international confidence. Despite the different approaches, the presidential candidates seem to agree that gaining access to international capital markets is key to improving the country’s fiscal stance.
Expectations that the new government will eventually devaluate the peso in the medium term have significantly increased the demand for the U.S. dollar in recent months. This has urged the Central Bank to intervene in the foreign exchange market, which has in turn pushed its foreign reserves to levels not seen in over a year. Recent data show that, in October, international reserves plummeted to USD 27.0 bn, which marked the lowest reading since March 2014. Against this backdrop, the incoming government might push for a faster deal with the U.S. hedge funds over USD 5.4 billion in defaulted debt. Sebastian Rondeau, LatAm FI Strategist at BofA Merrill Lynch, mention the main risks the economy faces going forward:
“Main risks: Large fiscal, external and monetary imbalances may trigger a currency crisis, and potentially a debt crisis, if policy corrections are not introduced in time, in our view. We think the market may perceive a more gradual approach as having more execution risks, given the magnitude of the country’s macro imbalances and low reserves. A deeper economic crisis in Brazil and lower commodity prices are also risks.”
In the legislative elections—held on the same day as the presidential elections—the governing FPV managed to keep the majority in the Senate, but lost it in the Lower House as it obtained 117 seats (down 26 seats from the previous Congress). A more fragmented Congress could lead to lower polarization, which may be positive, but at the same time, this might make it more difficult for the incoming government to pass important legislation.
Author: Dirina Mançellari, Senior Economist