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Analysis
Let the battle begin

Let the battle begin

Complex mathematics of Argentina's October poll 

by David Smith

Thu 13 Aug 2015

The markets spoke early, and optimistically, in the immediate aftermath of the weekend’s primary elections in Argentina. In New York on the day after the vote, Argentina energy stocks rose by an average 6%. In Buenos Aires, the Merval index saw a healthy gain of 4.7%. On international markets Argentine bonds touched a two-month high.

‘We like what we saw in these results,’ to quote one Latin American investment guru in Miami. ‘The majority of Argentines voted against the present government, and its candidate. That has to open the door to a major change come election day proper.’

The rather complicated mathematics of this election year, in this most southerly of capitals, defy simple conclusions. Yet the weekend vote, an early look at how the country will split come 25 October, tells us plenty. Argentina is starkly divided. The economy is the number one issue. And the chances of the ruling dynasty carrying on regardless have dimmed substantially.

That dynasty, built around the outgoing President Cristina Fernández de Kirchner and her predecessor, her late husband Nestor, has worked overtime and spent lavishly on creating the illusion of invincibility, for themselves and their anointed successor, Buenos Aires Governor Daniel Scioli.

But 12 years in power have bequeathed an economy in freefall, with inflation running at 30%, poverty and unemployment rising, and a budget deficit spiraling. To prime the domestic pump ahead of the elections, the government has been borrowing at extraordinarily high rates of interest, its access to capital markets limited by legal disputes with ‘hold-out’ creditors who refuse to accept earlier debt deals that paid 35 cents on the dollar. That legal battle, by the way, returns to the New York courts this week.

‘The Kirchner strategy is to mortgage the future, and leave us with a crisis of their making,’ says an adviser to Mauricio Macri, mayor of Buenos Aires, and now the lead opposition candidate.

The Kirchner strategy was to bury Macri in the first round of voting in late October, when the winner needs 40% of the vote and a lead of 10% over the nearest rival to clinch victory. That seems unlikely now, and Macri’s chances rise if the election goes to a second round, when he becomes the likely standard-bearer of the 60%-plus of Argentines who said No to the Kirchner dynasty at the weekend.

Witness the way the major cities – Buenos Aires, Cordoba, Mendoza, Santa Fe – voted against Governor Scioli. Many voted for Macri, but there was also a notable showing for the third-party candidacy of former Kirchner ally, Sergio Massa. Even in Scioli’s all-important bastion, the heavily-populated province of Buenos Aires, Macri’s candidate won the personal vote amid a scandal engulfing the ruling party’s lead nominee. Together with Massa’s candidate, the opposition carried the province, unthinkable before this vote, and seismic because almost 40% of voters live there. So how these opposition leaders unite, or don’t unite, could be decisive.

Macri and his team have been coy about detailed proposals, but their agenda is pro-market, pro-business, pro-growth. ‘We have to return to the real world,’ says Macri. ‘We have to confront reality, rather than build a fantasy economy, where all is well, because the government says so – and lies in the process.’

What comes next is almost certainly a no-holds-barred campaign. The fork in the road is clear. Will it be more of the same, a populist, interventionist government that seizes back the oil industry, and renationalises the state airline, losing millions of dollars a day in the process? A government that refuses to devalue the peso, even as the ‘unofficial’ dollar rises by the week? A government that dilutes the inflation rate, producing statistics that are derided by serious economists?

Or is Argentina ready for major change: music to the ears of investment bankers and money managers in Wall Street, not to mention the City of London? A new government could trigger a mini-buying stampede, because many putative investors have done reconnaissance in recent months, particularly on the energy sector, and the appetite for risk is strong – despite Argentina’s history.

Only the foolhardy make predictions about Argentina. What is clear is that the battle has been joined. The Kirchner dynasty holds any number of important cards, not least almost half the population dependent on government subsidies, a capacity to print money in the next couple of months, and a state-controlled media machine that can be, let’s just say, economical with the truth.

But the opposition has a window of opportunity now, and how they use it will be critical. As so often in the global south, the opposition needs to be the sum of its parts if it is to succeed. No wonder Mayor Macri began this week by echoing the slogan of the Obama campaign in 2008. Si se puede!

David Smith, member of the OMFIF Advisory Board, represented the UN Secretary-General in Argentina 2010-14.

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