Why Argentina Shuddered at Prospect of Change at Top

(Bloomberg) -- Nothing was decided in Argentina’s primary election Aug. 11. It was only meant to provide a sign of voter sentiment ahead of the real vote Oct. 27. What, then, explains the economic earthquake and market free fall caused by the results? The poor showing by Mauricio Macri, Argentina’s president since 2015, was part of it, since he’s been seen as an economic reformer, albeit one with mixed results. But there’s another factor: The opposing ticket, the one on course for victory, gives some Argentines and investors a troubling sense of déjà vu.

1. What sparked the panic?

Macri was soundly bested by opposition candidate Alberto Fernandez, a result that many now expect will be repeated Oct. 27. Pollsters had projected a small advantage for Fernandez. After Fernandez’s 16 percentage-point win, Argentina’s sovereign bonds and stocks plunged, and the Argentine peso fell as much as 32.6% the day after the vote. The market rout continued over subsequent weeks, with Argentine depositors withdrawing savings from dollar-denominated accounts. That led the government to announce it would postpone $7 billion of payments on short-term debt this year -- a move Standard & Poor’s briefly labeled a “selective default” -- and seek to extend maturities on $50 billion of longer-term obligations. On Sept. 1, Macri imposed capital controls in a blunt policy reversal aimed at containing the crisis.

2. Why did the result lead to a market free fall?

Markets are spooked less by Fernandez himself than by the prospect of a return to the populist policies of his vice-presidential running mate, Cristina Fernandez DE Kirchner. During her two terms as president of Argentina, from December 2007 to December 2015, the government implemented protectionist measures such as tight currency and capital controls, trade barriers, and energy and public transportation subsidies. Unable to tap international debt markets, her government oversaw what became a closed-door economy, with connections to Venezuela and Cuba. Kirchner began her political comeback by winning a seat in the Senate in 2017. She’s facing criminal prosecution for alleged corruption, with charges stemming from her presidency and that of her late husband, Nestor Kirchner. In all, there are 11 probes of her, her family members and associates.

3. What has Macri done for Argentina’s economy?

He took office pledging to open up the economy after a dozen years of isolationism, to combat widespread poverty and to cut inflation to single digits. He had lifted currency controls that had shaken confidence in the peso and settled a 15-year dispute with creditors that paved the way for Argentina to sell debt abroad in April 2016 -- $16.5 billion in bonds that at the time set a single-day sales record for a developing country. Macri also inaugurated infrastructure works worth billions of dollars, and he corrected years of government data on matters such as inflation and gross domestic product that had been made up or polished. Argentina emerged from recession in the third quarter of 2016. By the first quarter of 2017, his tax amnesty plan had convinced Argentines to declare $116.8 billion in assets that had been hidden under mattresses or overseas.

4. Then why did he fare so poorly at the polls?

The economic recovery Macri promised hasn’t endured. He failed to deliver on pledges to attract foreign investment. In May 2018, he had to seek a $56 billion bailout from the International Monetary Fund, the largest loan it has ever handed out. The country returned to recession in 2018, with unemployment in the double digits, inflation that’s running at an annual pace of 55% and the world’s highest interest rates. With more than a third of the population living below the poverty level, Macri found himself before and after the primary vote fighting populism with populism: freezing prices on food items, mobile phone bills, electricity, gas and public transport.

5. Would Kirchner call the shots as vice president?

That’s the big question, with no clear answer. She had been expected to seek the presidency before announcing on her YouTube channel in May that she would instead run as vice president on a ticket headed by Fernandez. (He was cabinet chief during her husband’s presidency and briefly under her as well.) Fernandez has insisted the decision-making power would reside with him, and some predict that he would turn out to be more market-friendly once elected. But many suspect that Kirchner would call the shots on major policy decisions.

6. Why do investors feel so strongly about Kirchner?

She was elected in 2007 to succeed her husband, who had dug the nation out of the largest debt default in history by riding a commodity boom and restructuring most of the debt. She continued his generous public spending and was re-elected in a landslide. But then the boom began to peter out. In 2012, she stunned foreign investors by seizing Argentina’s main energy company, YPF. Argentina’s 2014 debt default — its eighth — came after the country refused to comply with a U.S. court order to pay the full value of bonds bought by U.S. hedge funds.

7. How does Fernandez compare?

He describes himself as pragmatic when it comes to the economy and is seen as more moderate than Kirchner. “There are times when things are solved with Keynesian policies, and other times when what you need is liberal policies,” he said at an August event. He also said there is no chance Argentina would default on its debt if he’s elected. At other times, he’s sent mixed signals, saying both that he wants an open economy and that he’d consider bringing back some capital controls. And his rhetoric has become increasingly combative, blaming the IMF for the country’s crisis and saying he wouldn’t ask for permission to put in place a plan to boost consumer spending.

The Reference Shelf

• Why the IMF’s loan to Argentina is troubled.
• Macri’s proposal to postpone short-term payments and extend maturities on long-term debt.
• A QuickTake explainer on Argentina’s economic struggles.
• A look at Macri’s economic gamble as he girds for a re-election battle.

--With assistance from Carolina Millan.

To contact the reporter on this story: Jorgelina do Rosario in Buenos Aires at jdorosario@bloomberg.net

To contact the editors responsible for this story: Andrea Jaramillo at ajaramillo1@bloomberg.net, Laurence Arnold, Vivianne Rodrigues

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