Less than six months before the first round of Argentine presidential voting, the future is looking uncertain for investors, bondholders and other private sector stakeholders exposed to Argentina. The main source of risk in coming years is a familiar face: Polls suggest populist former President Cristina Fernandez de Kirchner stands a good chance of being elected president in the second round of voting on Nov. 24. The runoff will likely be a head-to-head battle between Fernandez and the business-friendly incumbent President Mauricio Macri, and a recent poll of that scenario showed the former president beating Macri by about 7 points. Such an outcome threatens to make the country's regulatory environment more challenging for the private sector while providing little relief for Argentina's financial woes.
Nearly four years after promising to turn Argentina into a friendlier destination for foreign investment, President Mauricio Macri faces problems similar to those of his predecessor, Cristina Fernandez de Kirchner. Argentina's endemic inflation has not abated and the threat of an eventual foreign debt default is rising.
Since Macri took office in late 2015, his administration has hit Argentine consumers heavily with government austerity measures, utility price hikes and deliberate currency devaluation in hopes of boosting exports. Consequently, consumer prices overall have nearly doubled since the end of 2016, and Argentines aren't happy. If elected, Fernandez would likely resort to populist moves that previously bore political benefits during the 2003 to 2007 presidency of her husband, Nestor Kirchner, and during her own time in office from 2007 to 2015. But though Fernandez's willingness to lower consumer food, fuel and utility prices will likely prove politically popular, it will make the next four years more difficult and less predictable for many businesses operating in Argentina.
Freezing Prices — and Freezing Out Foreign Retailers
One move that would appeal to voters but bring pain to foreign businesses would be presidential decrees to freeze consumer prices on food and other essentials, such as fuel, electricity and water. Voters — even those who opposed Fernandez — would almost certainly meet such measures with acclaim. And since Fernandez and her Justicialist Party would start angling for midterm congressional gains in 2021 elections as soon as she takes office, she would have every incentive to enact such price freezes. Meanwhile, however, the foreign-owned retail, energy and utility sectors in Argentina will see such action as a harbinger of future uncertainty. Though a Fernandez government would most likely move to freeze the prices of staple goods, including grains, bread and milk, Argentina's recent poverty spike may drive her administration to extend price controls to a wide range of food and essential goods — possibly including fuel — for several years, which would eat into profit margins. In response, retailers could reduce or cease supplies for a no longer cost-efficient Argentine market.
How Enacting Currency Controls Restricts the Private Sector
Along with extensive price freezes, a Fernandez presidency could also bring the return of currency controls. Since defaulting on its foreign debt in 2001, Argentina has been plagued by endemic capital flight; Argentines wary of keeping savings in a country experiencing an unstable currency, high inflation and an irregular regulatory environment have been moving their capital to other places. This development concerned Fernandez's previous government enough that it enacted currency controls in 2011, hoping to keep more taxable wealth in the country and prevent the Argentine peso from further weakening against foreign currencies. However, currency controls also limited the private sector's ability to freely buy and sell foreign currency, making it more difficult for foreign companies to repatriate their peso-denominated earnings.
During Fernandez's second term, these controls resulted in a growing black market for dollars and also simply complicated companies' business plans. But stubborn inflation may drive a new Fernandez government to consider the return of such controls anyway — especially since the option of employing the same austerity measures used by the Macri government (such as hiking interest rates and cutting government spending) would deeply damage voter approval.
The Possibility of Default and the Risk to Investors
Finally, companies doing business in or with Argentina would face the growing threat that the government might default on some foreign debt obligations. Currently, Argentina's government relies on a $56 billion International Monetary Fund package to close the country's budget deficit. If voters elect Fernandez again, her government could see that as a signal of voters' rejection of Macri's economic and fiscal policies, granting her permission to let the budget deficit grow in service of prioritizing the interests of voters ahead of those of lenders or private companies. For Fernandez, voters' desires almost certainly outweigh the need to boost exports or make it easier for companies to do business in Argentina.
But populist-inspired deviation from austerity measures will raise the risk of default. For example, Fernandez may choose to stabilize the peso through foreign exchange intervention, even though such a move would strain the country's foreign reserves, which only total $72 billion even after the IMF loan. Total annual government revenue is expected to be around $75 billion for 2019 (and will likely remain similar in coming years). Meanwhile, Argentina will owe about $26 billion in dollar-denominated debt in 2020 and 2021 alone. And collapsing imports and a heavy trade dependence on the sluggish Brazilian economy won't provide the country with much more additional income to meet its debt payments. Ultimately, the federal government has very little room for error when it comes to repaying its foreign debt amid the current economic downturn.
Populist-inspired deviation from austerity measures will raise Argentina's risk of defaulting on foreign debt.
Default would likely accelerate the peso's depreciation and make it even more difficult for investors to raise capital for projects in Argentina. Many companies would struggle to make business plans — or even turn a profit — amid the resulting inflation. That inflation would also likely increase strife between workers and employers, as unions would demand larger and more frequent wage increases to mitigate the rising cost of living.
The results of Argentina's November presidential election runoff will be a crucial indicator of the country's economic direction over the next few years. If Fernandez wins, she will prioritize efforts to reduce the austerity measures that have caused pain for her voters — even though the Argentine government will continue to face the looming possibility of default and a loss of investor confidence. For the private sector and holders of Argentine debt, a new Fernandez presidency means a much riskier business environment in Argentina.