Editor's Note: This assessment is part of a series of analyses supporting Stratfor's upcoming 2019 Fourth-Quarter Forecast. These assessments are designed to provide more context and in-depth analysis on key developments over the next quarter.
In the primary presidential vote on Aug. 11, populist candidate Alberto Fernandez handily defeated the country's conservative president, Mauricio Macri. For months, opinion polls had given Macri a fair chance of winning the Oct. 27 presidential ballot, and Fernandez's victory caught financial markets largely off guard, deepening the country's economic tailspin.
Instead of using the upset to fight even harder to secure reelection, Macri will spend the next few weeks trying to prevent the country's financial situation from deteriorating further. But that won't be easy, meaning that the uncertainty shrouding country's future will likely only get murkier in the lead-up to the October vote — and probably will linger long after that, should a protectionist government wind up back in Buenos Aires before the year's end.
Argentina's populist opposition candidate defeated the country's pro-business president by more than 15 points in primary elections widely seen as a prelude to the presidential vote in October. This has since reignited fears of a return to strong state intervention in the Argentine economy, along with high levels of public spending and a renegotiation of Argentina's deal with the International Monetary Fund.
Macri's Uphill Climb
Per Argentine electoral law, a candidate must secure at least 45 percent of the vote in the first election round on Oct. 27 — or conversely, 40 percent with at least a 10-point lead over the runner-up — in order to win the presidency. If neither Macri nor Fernandez meets either of these conditions, a runoff between the two frontrunners would happen Nov. 24. With or without a runoff election, however, the winner will assume office in Buenos Aires on Dec. 10.
In the coming weeks, Macri will try to convey messages of stability and calm after the recent slate of chaotic financial and political events in the country. He'll also consider new rounds of public spending hikes and tax cuts in an attempt to resurrect his reelection campaign and prevent a decisive first-round victory for Fernandez. But Fernandez received 47.7 percent of the vote in the Aug. 11 primary election — meaning he stands a good chance of winning it all come Oct. 27.
At the same time, Macri will also be busy contending with Argentina's crumbling economy. In the wake of Fernandez's unexpected primary victory, the Argentine peso has lost more than 20 percent of its value against the U.S. dollar, forcing Argentina's central bank to tap its reserves to shore up the currency. Buenos Aires also has introduced currency controls to mitigate capital flight and announced it was "reprofiling" some of its debt repayments (or what the credit rating agency Standard & Poor later redefined as a "selective default").
The controls are particularly burdensome for companies, which must seek the government's permission to repatriate their profits abroad. But the burden on the average Argentine is still relatively light, as individuals are allowed to purchase a maximum of $10,000 per month (an astronomical amount of money for a significant part of the country's population). But while the currency controls introduced in early September have stabilized the peso, this could prove short-lived in a country where savers and investors see the U.S. dollar as a source of protection against economic uncertainty.
The central bank's ability to defend the peso is quickly deteriorating. Between mid-August and mid-September, the bank went through roughly 20 percent of its foreign reserves, which now stand at $51 billion, down from around $66 billion early last month. Meanwhile, private sector dollar deposits fell to around $24 billion in September, from roughly $32 billion the previous month. Entrenched mistrust in the Argentine economy means that the run against the peso will likely continue, forcing the central bank to continue pumping more dollars into the financial system. As a result, the Argentine government may have little choice but to tighten capital controls ahead of the election — and likely longer.
This will risk resurrecting black market operations in Argentina, as households and businesses look for alternative ways to purchase U.S. dollars. In Argentina, the black market dollar (locally referred to as the "parallel dollar") plays an important role in setting inflation expectations, as well as prices for goods and services. Should more Argentines start flocking to the black market, the "parallel" dollar could soon become a more credible benchmark for Argentina's economic outlook than the "official" dollar.
The Fate of Argentina's IMF Loan
But Macri isn't the only one struggling to find his footing amid the financial and political uncertainty. In September 2018, the International Monetary Fund (IMF) signed a $56 billion standby loan agreement with Buenos Aires — the institution's biggest-ever foreign aid package. Macri saw the agreement as a way to stabilize the peso and bring some predictability to Argentina's perennially unstable economy. But the decision proved deeply unpopular among Argentine voters, as many still blame the IMF in part for the 2001 economic crisis that ended in the country defaulting on its debt. Fernandez, who has criticized the IMF loan and the austerity measures attached to it, has promised to renegotiate the deal if he becomes president.
The IMF — which already delivered some $44 billion to Argentina — now faces its own dilemma. The institution could release the next $5.4 billion tranche of the loan due in late September, knowing that Buenos Aires may struggle to repay it. Or it could delay the disbursement until the next president takes office, but that risks worsening Argentina's financial situation in the interim. Indeed, the IMF itself will have a new president starting next month, which could make waiting to deliver the next tranche a more tempting option.
But even if Fernandez wins, the institution is unlikely to simply walk away from the Argentine rescue program. Instead, the IMF will likely wait to see just how serious he might be about renegotiating the agreement. Members of Fernandez's economic team have already met with IMF representatives, which suggests his government would not go so far as to outright cancel the deal — at least, initially. But his continued critique of the agreement's terms nonetheless suggests he might consider that option.
A Brief Reprieve
If the presidential vote results in a landslide victory for Fernandez, the new president will be in a relatively stable political position — especially if his Peronista party wins control of at least one of the two chambers of Argentina's Congress in concurrent legislative elections. But Argentina's deepening financial crisis will likely cut his honeymoon short, as he'll face massive pressure from all sectors of Argentine society — from trade unions to business organizations — to resurrect the country's economy as promised. History has shown that high levels of popular support in Argentine politics can just as easily turn into widespread discontent and, in turn, social unrest.
Argentina's return to populism is more likely than ever, as Macri struggles to keep his country's economy - and political future - from collapse in the coming weeks.
In addition to grappling with Argentina's daunting economic downturn, Fernandez will also be tasked with balancing the moderate and populist factions within his Peronista party. Former president Cristina Fernandez de Kirchner, who heads the more populist faction of the party, is running as Fernandez's vice-presidential candidate. Her personal political ambitions likely will drive her to push for influence over government decisions well beyond what her vice-presidential powers formally allow. She will also likely seek to appoint loyalists to other powerful positions. But the more the new president seeks to assert his authority on government affairs by reducing that of Fernandez de Kirchner's, the more likely it is that the two leaders (and their respective party factions) will clash — creating instability at the highest levels of Argentina's government.
A Return to Protectionism Looms
From a foreign policy perspective, a government led by Fernandez would put into question the continuity of the free trade agreement recently concluded between the European Union and South America's trade bloc, Mercosur. Fernandez is opposed to the deal, which the Argentine parliament has yet to ratify — increasing the likelihood that his government may decide to scrap the deal.
A Fernandez victory also risks renewing tensions between Argentina and Brazil, especially when it comes to trade. Brazilian President Jair Bolsonaro — a vocal ally of Macri — recently threatened to leave Mercosur should Fernandez impose protectionist policies that undermine Brazilian exports to Argentina. This is not a decision that Bolsonaro will take lightly, given that Argentina is Brazil's third-largest export destination. The warning nonetheless suggests that a more protectionist approach by Buenos Aires under Fernandez could threaten the continuity of the South American trade bloc. But that may very well be where Argentina is headed next, as Macri struggles to keep his country's economy — and his political future — from collapsing under his feet.