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Jun 15, 2015 | 09:15 GMT

5 mins read

For Argentina's Next President, Few Economic Options


Argentina's political landscape is coming into focus as the various political blocs prepare for the Aug. 5 presidential primary and general elections in October. Over the past few weeks, the race has narrowed to a contest between the business-friendly Republican Proposal candidate, Mauricio Macri, and the ruling Front for Victory's candidate, Daniel Scioli.

While a Macri victory would seem to bode well for Argentine businesses, the outcome of the upcoming election will have little impact on the country's fiscal policies over the next presidential term. Argentina's strained public finances and worsening dollar inflow will leave little room for the future president to pursue economic policies guided by individual ideology. Regardless of which candidate wins, the country's next leader will have to take several steps to address Argentina's economic decline, likely including loosening restrictive currency controls, improving the domestic investment climate, and settling the country's state of default with foreign creditors. Progress will be slow, and the process of reviving Argentina's economy will last beyond the next administration. 

Argentina's major political parties — the ruling Front for Victory, the conservative Republican Proposal and the dissident Renewal Front, a Peronist political alliance — have already locked down their coalitions ahead of the August primaries. Scioli, who is the chosen successor of Argentine President Cristina Fernandez de Kirchner, has the full backing of the Front for Victory. Meanwhile, lacking support outside of Buenos Aires province, the Republican Proposal party has allied with the smaller Radical Civic Union, which is popular in the country's provinces but lacks an established political machine in the capital. Macri, the Republican Proposal candidate, is a political outsider removed from Argentina's Peronist political circles, and he represents the sharpest ideological break from the ruling Front for Victory. By all appearances, he is also the most business-friendly candidate. Both he and Scioli have publicly promised to reverse several current policies, including controls on obtaining and repatriating foreign currency. The Renewal Front's candidate, Sergio Massa, has also supported revising currency controls and has courted rural voters by promising to ease grain exports. 

At this point in the race, only two real contenders remain. According to a Rouvier y Asociados poll conducted in early June, Scioli would receive around 29 percent of the vote, while Macri would win around 27 percent. Massa, who earlier this year appeared to be a contender, has fallen behind and now holds support from only around 19 percent of voters. However, because Massa is still in the race and no candidate appears to be popular enough to meet the 45 percent threshold needed to declare victory, the election will likely extend into a second round after the initial Oct. 25 vote. (According to an early June poll, Massa voters will likely defect to Scioli if their candidate drops out during the first round, giving Scioli roughly a seven-point lead over Macri.)

Argentina's Presidential Race

Election Results Won't Change Economic Policy

While the presidential race is shaping up to be a close contest between ideological rivals Scioli and Macri, its outcome will have relatively little impact on the economic policies of the next administration. Argentina's economy will constrain the options available to the victor, likely forcing whoever wins to take several key steps toward reversing the economy's decline. In the short term, the new president will likely loosen currency controls and begin settling Argentina's legal dispute with its holdout bondholders. The country's currency controls, though somewhat successful as a short-term solution to capital flight, have complicated the repatriation of capital by foreign entities, dissuading foreign direct investment and hampering domestic production — two things Argentina desperately needs in coming years if it is to maintain a positive balance of payments. Regarding its dispute with bondholders, Buenos Aires could begin negotiations once the new president takes office. Holding out against the so-called vulture funds has scored political points for de Kirchner in the waning days of her administration, but Argentina cannot afford to be locked out of international capital markets over the long run. Eventually, it must reach an agreement with its bondholders.

That said, Argentina's public finances are not yet strained to the point that leaders must reach a deal with its bondholders at any cost. While the country's foreign reserves declined by about $15.5 billion (nearly 31 percent of their original value) between 2010 and 2015, Argentina's reliance on soybean export taxes for replenishing its foreign currency reserves has guaranteed a steady inward flow of dollars, albeit at a far lower rate than previous years. This has given the country some cushion with which to formulate a negotiating strategy against holdout bondholders. Still, with around $10.7 billion due this year and a steadily shrinking pool of dollars with which to make repayments, purchase imports and replenish reserves, Buenos Aires will not be able to draw out negotiations for much longer.

Progress Will Be Slow

While the next president will inevitably need to implement some economic reforms, the degree to which he can fix the country's economy will likely be limited. Severe austerity policies or a significant devaluation of the peso to bring it back in line with the black market value of the dollar would only inflame public sentiment and hamper the country's efforts to settle its foreign debts and improve currency inflows. Devaluing the peso enough to bridge the gap between the overvalued legal rate and the black market rate — 9 pesos to the dollar and 12.4 pesos to the dollar, respectively — would likely exacerbate Argentine inflation, which was estimated to be about 40 percent year-on-year in 2014. Argentina's central bank already contributes to the peso's depreciation: Decreased flows of foreign currency into the country over the past few years prompted the bank to finance the government's growing budget deficit (estimated at $6.4 billion at the end of the first quarter) by printing additional pesos, boosting Argentina's money supply by 22 percent in 2014. Additional measures to lower the peso's value could generate unrest among Argentina's organized labor and farmer movements, which are already unhappy with the government's policies. If the next administration miscalculates and incites a response from other restive segments of the population, it could delay Buenos Aires' long-term efforts to attract investment and implement reforms.

Overall, the next four years will mark Argentina's transition away from de Kirchner's state-centric economic model and toward a more liberal one. For much of the past decade, Argentina has been able to offset its economy's structural problems with rapidly increasing foreign demand for soybeans and creative ways of raising capital. But with the drop in soy prices over the past several years and the country's diminishing options for public financing, the next government will have to set the stage for a more market-friendly economy. However, the road to opening the country up to foreign capital will be bumpy, and investors should not expect to next administration to achieve complete success.

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