Yesterday, Argentina went to the ballot box to elect the candidates for the important mid-term elections in October. These primaries (referred to as PASO) were seen as an early indicator whether president Macri’s Cambiemos can solidify power in Congress in October. In order to ensure people would vote with a clear mind, the sale and consumption of alcohol on election day was prohibited, depriving this observer from his usual glass of Malbec on a sunny Sunday afternoon at La Biela. One can challenge the effectiveness of the alcohol ban as this did not prevent Argentines to elect Nestor Kirchner in 2003 and, even worse, his wife, Cristina Fernández de Kirchner (CFK), twice (in 2007 and 2011)!

Despacito, your Malbec is on the way…

However, we have not been disappointed this time around: Cambiemos bagged a resounding victory with 35.9% of the national vote and received the most votes in 10 out of 24 election districts, including the city of Buenos Aires, Cordoba and Mendoza. Even better, Cambiemos embarrassed CFK by beating her at her home turf (in terms of voter base) in the province of Buenos Aires, albeit with a tiny margin (let’s call it a tie). This was the worst ever result for CFK in the politically important province (home to the shanty towns of Buenos Aires where people lived on CFK’s handouts), even underperforming Scioli’s pathetic 2015 campaign. Predictably, she called the election a fraud and requested a recount.

Again, the real thing is only happening in October: the PASO is just a superfluous money-wasting overture. If Cambiemos’ election performance is maintained in October, the government would be adding 9 senators (or 8 if the province of Buenos Aires is lost to CFK) and around 15 members in the lower house (increasing the Cambiemos bloc from 89 to 104. There is reason to believe that Cambiemos can do better in October. The anti-CFK vote, already visible from weak performance of the parties in the middle ground (which still is leftist-populist in Argentina), could gather speed, whereas the government has two more months to show that its robust economic policies pay off, using targeted infrastructure projects (yes, they too are politicians) to make the point.

The government still faces a high primary fiscal deficit of about 4% and stubbornly high inflation of 22% (however, both economic indicators already are on a downward path). This means that time is of the essence and that solid economic growth will be required to get out of the quagmire. Therefore, after the mid-terms in October the government should speed up reforms. These should be focused on increasing investments and productivity. A strong showing in October might convince foreign investors that Macri (or party goddess María Eugenia Vidal) has a good chance to reign beyond 2019, making long-term commitments to the country possible. Reducing red tape and establishing an one-stop shop to licensing are easy and proven ways to improve the business climate. Corporate tax rates, which are high by international standards, should be reduced, partially financed by broadening the base for personal income taxes. Productivity should be raised by better (vocational) training and by comprehensive labour reforms. Many Argentine entrepreneurs tell us that hiring workers is akin to committing suicide as there is no way to get rid of them once they are hired and the workforce needs tweaking. This, amongst other things, has resulted in a large informal economy (especially at SME level) and in corporate zombies (like SanCor, Aerolineas) that no one wants to touch as restructuring is a near impossibility. Further, distorting energy subsidies should be phased out and import tariffs and other trade barriers removed. Only then, Argentina will become more competitive and, eventually, much-needed jobs will be created.

The government does not have a majority in either house of Congress to push reforms through. Thus, the government still will need to negotiate with governors and (probably to a lesser extent) with lawmakers in the middle ground (Massa’s 1Pais party, for example). As CFK’s hold on the Peronist party is fading, compromises may be easier to reach. As for CFK herself, let’s hope she loses the race for senator of the province of Buenos Aires to Esteban Bullrich (the candidate of Cambiemos) so that investigations into corruption under her watch during her time in the Casa Rosada can proceed unhindered. That must be a sobering thought for her…