By Martin Burgos.
“Political vacuum”, “default” and “hyperinflation”: these are the terms being used by several economists from Argentina’s public service, discussing the country’s current political and economic situation.
Earlier this month, the Peronist opposition led by Alberto Fernández defeated the right-wing government of President Mauricio Macri in the primary elections by 47 per cent to 32 per cent. Primary elections in Argentina feature a selection of candidates and are open to the entire electorate, not only party members. the system was introduced in 2009 as a way of reducing the number of candidates in presidential elections. The participation rate for the the primaries held on August 11 was 75 per cent of the electorate.
This result, in effect, means that there is no chance that President Macri can reverse the situation in the presidential elections scheduled for October 27. Fernández leads the main opposition coalition, Frente de Todos, and his running mate is the former left-wing President Cristina Fernández de Kirchner. If he succeeds in gaining 45 per cent of the vote (or 40 per cent with a 10 per centage point lead), he will be elected President in the first round.
This situation means that we currently have a president continuing in office, with Fernández waiting to be able to assume his duties on December 10, after the ratification of his election in October.
As a result, Macri and his government exist in a political vacuum: he does not have the real power to lead the country and implement economic policies, while Fernández has real power, but not formal power. Game theory identifies this as a potentially dangerous situation, especially since the outgoing president has chosen an aggressive strategy that may be explosive for the country. This moment is reminiscent of the 1989 Alfonsin-Menem transition, when the former president had to anticipate the transition of power in the middle of an episode of hyperinflation.
The reasons for Macri’s defeat are clear: the electorate soundly rejected his neoliberal economic policies that have led to indebtedness, rising interest rates, the fall in GDP and wages since 2016, increases in utility rates, the rise in inflation that has reached 52 per cent (compared to 25 per cent in 2015) and the tumbling exchange rate (at 45 pesos per dollar, compared to nine pesos per dollar in 2015). The economic crisis of 2018, from which the country never recovered, combined with the unification of the opposition explains this political Waterloo of the Argentinian right.
Markets react with capital flight
The day after the primary elections, the exchange rate tumbled further, from 45 to 55 pesos, and the stock market fell by 30 per cent. The Emerging Market Bond Index (EMBI) Country Risk rose from 800 to 1800 points, illustrating investors’ doubts about Argentina’s ability to repay its debts. The 75 per cent interest rate the day after the primaries did not have positive effect on monetary variables, and the rush to the dollar was unstoppable.
For the “markets”, the defeat of their champion is grim news, especially as the talk on Wall Street describes Alberto Fernández as a puppet of Cristina Fernández de Kirchner, and fears a return of “populism” and “Chavismo” in Argentina.
The risk for Macri is that the economic chaos caused by his allies in the financial world will be used against him in the presidential campaign. For the moment, the support of the International Monetary Fund is propping up the government. The IMF sent the director of the central bank to Washington to request a $20 billion loan from the US government.
While US President Donald Trump has consistently helped Macri, it is very likely that this aid will end. That day, the government will have a hard time coping with the forces of the “market”, the very same forces that promoted Macri to power.
Martin Burgos is an economist at the Centro Cultural de la Cooperación in Argentina. Title photo shows Alberto Fernández, right, with former President Cristina Fernández de Kirchner