On August 11th, another black page was written in Argentina’s economic history book. In primary elections (the “Paso”) for the presidency, incumbent Mauricio Macri was dealt a heavy blow by the opposition, led by the Perónist duo Alberto Fernández and former president Cristina Fernández de Kirchner (CFK, no relation to Alberto), who wisely kept a low-key presence during the campaign. The Perónists won by a 15% margin, reaching a near majority of 47%. If that was not yet enough, even the popular María Eugenia Vidal, the current governor of Buenos Aires province and in our view a better presidential candidate for Cambiemos, lost out to Axel Kicillof, a former minister of economy under CFK responsible for the part-nationalization of YPF and its wrongheaded strategy to deal with holdout debtors, resulting in debt default in 2014. As the main candidates were uncontested in their parties, the Paso (a silly CFK invention) effectively functioned as a dress rehearsal for the real elections on October 27th. Markets were shocked. The Merval index, representing the (smallish) Argentine stock market, plunged by 48% in dollar terms whereas the peso depreciated from 45 to 60 per dollar, prompting the central bank to hike interest rates to 74%. 5-year credit default swap spreads jumped to over 2,000%, implying a probability of default of 73% over this period, whereas credit rating agencies rushed to downgrade the sovereign debt (the substantial weakening of the peso makes servicing dollar debt challenging, to put it mildly). No wonder international brokers started to publish their thoughts about what the recovery rate on bonds could be with default now deemed to be a near-certainty. Only a run on bank deposits has not materialized (yet). Clearly, the election outcome was highly unexpected though the price action seems somewhat overdone (also given illiquid markets due to holidays in the Northern Hemisphere). Indeed, in the days following this Black Monday markets recovered slightly.

Fernández Squared in the lead…

Macri made an unforgivable political error by blaming voters not to understand economics (a day, later he apologized). He has a point though. Economists were forecasting a recovery in growth, pencilling in -0.1% and 1.9% for the 3rd and 4th quarter respectively (-1.5% for the whole of 2019) and 2.2% for 2020 (Bloomberg consensus). The IMF, possibly talking their own book given the huge bet they placed on Macri’s reign, believed the economy was gradually recovering from last year’s recession, projecting GDP growth to increase to -1.3% in 2019 and 1.1% in 2020 on the back of higher agricultural production and a gradual rebuilding of consumer purchasing power with inflation slowly falling. These projections now can be thrown out of the window. After the Paso, many large Argentine companies announced an immediate freeze on any capex outlays (and, most likely, on payrolls as well). Many international firms are expected to do the same, given the troubling experience under CFK’s policies during her years as president (2007-2015). The international oil companies that invest in Argentina’s huge shale reserves certainly will remember her dealings with YPF and are likely to turn off the tap. So, GDP growth will collapse, also because consumption will be hit by another bout of inflation as prices for imported goods will become dearer. The recent sell-off in international financial markets and the strengthening dollar are not helpful either.

Macri has made plenty of mistakes whilst in office (see our blog “Sinceramente…” of May 31st) and he continues to make them (think of the recent CFK-inspired 3-month price cap on petrol, for example, disturbing market prices and, thereby, capital allocation; simply paying a check to poor people out of the government’s coffers would have been a better choice, in our view), but he is Argentina’s best bet to nurture the economy back to growth by implementing credible and trustworthy macro-economic policies as well as overdue structural reforms to increase productivity. Nicolás Dujovne’s resignation as Finance minister was unnecessary, in our view.

Goodbye…?

Some broker analysts hope that, once in office, Mr. Fernández turns out to be a relatively market-friendly candidate (but, then, they also said this about AMLO when he became Mexico’s president last year, and see what became of that!). Indeed, Alberto certainly is a better choice than CFK and in his time in office as cabinet chief from 2003 to 2008 he had good relations with the corporate sector. Within the party, he is on the center-right wing (but still rather leftist, unfortunately) and not known as a radical populist, like CFK or Kiciloff. However, during the campaign, he also said he might renegotiate the IMF loan package and default on sovereign bonds (he somewhat softened this statement after the Paso, though), not exactly things investors want to hear. He has not laid out what economic policies he is going to adopt once elected as president. It is not likely that before the end of October he will come out, saying he will continue with Macri’s policies to cut back government spending and liberalize (labour) markets, even if this might be on his mind given that Macri already has done most of the heavy-lifting and Alberto can blame him for the hardship. For Argentina, being 2 months in limbo and then face a new, relatively unknown, character in the Casa Rosada, who may need some months to articulate his views and convince markets that he is “not crazy in government” (as he claims to be), is a very long time. By then, we are afraid that the damage done may be irreversible and CKF/Kicillof may get the upper-hand, imposing their disastrous economic policies on Argentina’s population.

In October, Argentines can vote for Macri, which immediately will appease markets and business, or risk more years of economic hardship under the Fernándezes…