Argentina: Argentine presidential elections drive hope for economic improvement
October 8, 2015
Presidential elections are just a couple weeks away and hope is growing that Argentina’s struggling economy will finally turn the corner under the administration of a new government. That is because the two presidential front-runners, Daniel Scioli—the candidate of the ruling left-wing Front for Victory (Frente para la Victoria, FPV)—and opposition candidate Mauricio Macri from the conservative Let’s Change (Cambiemos) coalition, are campaigning for more market-friendly economic policies. Recent polls show that Scioli is widely expected to win the first round on 25 October. However, it’s not clear yet whether he will secure the necessary votes to avoid run-off elections in November. No matter who wins, there is optimism among voters and investors that the successor of President Christina Fernández de Kirchner—who cannot run for President due to term limits—will reverse the current government’s interventionist policies and resolve the holdout saga with the U.S. hedge funds.
In the last 12 years, Argentina’s political landscape has been dominated by the FPV party under which the state has exercised great control over the economy, including the imposition of capital controls and heavy taxes on agricultural products. Scioli has broadly campaigned for a gradual shift from the current economic policies. He has promised to attract more foreign investment in the country, bring down the high level of inflation and also reduce fiscal spending. On the other hand, Macri is pledging a more immediate economic change. He is campaigning for unwinding currency and trade controls and removing or reducing export taxes as a necessary step toward building international confidence. While this move would imply an inevitable devaluation of the currency, it would also call for a substantial increase in the Central Bank’s foreign reserves.
Despite the different approaches, the main presidential candidates seem to agree that improving Argentina’s credit stance and hence gaining access to international capital markets is key to addressing the current macroeconomic imbalances. This in turn, might push for a fast deal with the U.S. hedge funds over USD 5.4 billion in defaulted debt. Sebastian Rondeau, LatAm FI/FX Strategist at Bank of America Merrill Lynch, comments on this issue:
“The dynamics of international reserves are critical in Argentina amid heightened pressures on the FX markets ahead of the October 25 presidential elections, given the lack of access to international capital markets and devaluation expectations. We think the Argentine currency is significantly overvalued after the devaluation in other emerging markets, especially in Brazil, and the drop in commodity prices. Against this backdrop, we believe any new government will have incentives to negotiate with holdouts in order to regain access to international capital markets to finance the fiscal deficit and increase reserves.”
Kirchner’s successor will inherit a beleaguered economy. Yet, the vision of a change in government is generating optimism amid hope that the new administration will implement more orthodox policies. The challenge for the incoming government will be knowing how to juggle a recovery in the economy while also restoring investor confidence.
Author: Dirina Mançellari, Senior Economist