Argentina: Policy uncertainty spikes as Fernández secures presidency
As had been widely expected, Alberto Fernández, candidate of Everyone’s Front coalition (Frente de Todos), comfortably secured the presidency in general elections held on 27 October. There is significantly less certainty, however, over what policies Fernández’s incoming government will pursue, having given few concrete details during his campaign. Although Fernandez is considered a moderate Peronist, his running mate was far-left populist former-President Cristina Fernández de Kirchner; Kirchner, who will return to office as vice president, oversaw a government characterized by runaway government spending, nationalizations, price controls and a politically-dominated Central Bank during her time as president between 2007 and 2015. Prospects of unsustainable spending and more market-unfriendly policies have already slammed confidence, which will likely continue to linger ahead amid policy uncertainty and severe macroeconomic imbalances. Underlining market concerns, Argentina’s dollar bonds fell the day after the elections.
Alberto Fernández made it clear that reactivating domestic demand is his key priority. Fiercely critical of the austerity measures adopted by President Mauricio Macri along the lines drawn by the IMF agreement, he has also pledged to boost salaries. This signals that he could resort to looser fiscal policies, which could put him on a crash-course with the IMF, and make a new deal hard to reach. There is considerable uncertainty over how a Fernández-Fernández administration will handle the country’s mountainous debt pile and its precarious fiscal situation, including the IMF’s unpopular credit loan, especially given the large funding gap the government will face in 2020. Moreover, his pledge to revive growth by boosting wages and consumption could further stoke already elevated price pressures, which could be additionally fueled in the event that a new Central Bank governor resumed monetary financing of the fiscal deficit.
Crucially, Fernández will not have carte blanche in policy formulation. Although he won the Presidency, he fell short of winning an absolute majority in Congress, with a better-than-expected electoral performance of Macri’s Together for Change (Juntos por el Cambio) giving Everyone’s Front and Macri’s coalition a similar-sized representation in Congress. Fernández will thus need to look for support outside of his coalition, especially among governors, regional parties and Peronists not belonging to Everybody’s Front. In this respect, Casey Reckman and Mariano Arrieta, economists at Credit Suisse, noted:
“We see Alberto Fernandez facing a variety of constraints that could potentially limit his effectiveness. The general election results suggest that Fernandez will have to negotiate within and outside of his coalition more than other recent Peronist leaders who presided over more homogenous political parties and enjoyed larger congressional majorities. They also depicted a polarized society at a time of intense financial and economic pressure. Fernandez may seek to pursue a growth-oriented economic policy program, but a complicated macroeconomic backdrop and the urgent need to secure financing could curtail room to maneuver on the fiscal and debt fronts.”
In a bid to placate market tensions, Alberto Fernández named a small transition team which will work side by side with Macri’s outgoing government in order to guarantee a smooth transfer of power. The new government will face a challenging economic and social environment, characterized by runaway inflation and sky-high interest rates, investor mistrust, the renegotiation of the country’s bulky debt and widespread discontent in a population hit by a rising unemployment rate and vanishing purchasing power. LatinFocus Consensus Forecast analysts see the economy in recession next year, contracting 1.6%, which is down 0.1 percentage points from the previous month’s forecast. In 2021, analysts see GDP finally rebounding, with growth coming in at 1.9%.