Argentina’s presidential primary raises policy questions

Argentina’s presidential primary raises policy questions

Argentina’s presidential primary elections shocked investors Sunday when President Mauricio Macri suffered a major defeat against leftist politician Alberto Fernandez, whose running mate is controversial former president Cristina Kirchner. According to the official election results, Macri received 32% support while Fernandez received 48%, a much wider margin than expected. Election authorities reported high voter turnout at 75%, and Fernandez won every province except Cordoba and the City of Buenos Aires.

In Argentina, the candidacy of Kirchner is perceived as a return
of populism — often referred to as “Kichnerism/Peronism.”
This brand of populism (which was also touted by Kirchner’s husband, former
president Nestor Kirchner) is faulted with creating much of the economic
disarray inherited by Macri when he took office. Cristina Kirchner is
facing corruption allegations, which she denies.

The first round of the presidential election is set to take
place on Oct. 27, with the second round, if required, on Nov. 24. The new president
takes office on Dec. 10. To win the first round, a candidate must obtain more
than 45% of the votes, or more than 40% plus a lead of at least 10 percentage points
compared to the second-place candidate. Otherwise, the first two candidates move
to the second round.

Markets took the news
very negatively

The day after the election, the Argentine stock market plunged 48% (in US dollar terms), the second-worst daily decline of any global stock market since 1950.1 The interest rate paid on the central bank’s benchmark interest rate rose to 74.8% from 63.7%, and the Argentine peso depreciated by more than 20%.1 US dollar-denominated sovereign bond prices fell 20-25 points, while corporate and provincial bond prices fell, on average, 10-15 points. 1

Argentine markets reacted negatively

Source: Bloomberg, L.P., Aug. 13, 2018 to Aug. 13, 2019.

Why this reaction?

In 2001, Nestor Kirchner took over the presidency amid a
similar economic shock. He restructured the country’s external hard currency
debt, raising concerns that the ticket of Fernandez and Cristina Kirchner might
take the same tack. Other market concerns center around uncertainty over policies
a new Fernandez/Kirchner team might pursue:

  • Will there be a relationship with the International
    Monetary Fund (IMF)?
  • What will energy sector pricing policy be?
  • Will there be new/higher agricultural export
    taxes?
  • Will there be caps on government lending rates?
  • Will capital controls be reinstated?
  • Who will fill key positions, such as Finance Minister
    and Central Bank Governor?

The future of the current IMF program is also in question.
Without the IMF’s help, Invesco Fixed Income believes Argentina would find it
very difficult to service its debt obligations, and it has not accessed
international capital markets since June 2018. We estimate that Argentina’s gross
financing needs are substantial, at around $145 billion in 2020 and $157
billion in 2021.

Invesco Fixed Income outlook  

Given the election outcome and Argentina’s current asset valuations,
we expect bond prices to remain volatile until there
is more clarity on what a Fernandez/Kirchner government might look like.

During the campaign, Fernandez
pledged policy continuity, saying that he saw no clear benefit to making
radical changes after the election and reversing Argentina’s commitments to the
IMF.

So far, there has not been much to
calm markets with both parties still in election mode. We believe markets would
find solace in announcements of orthodox policies in the categories highlighted
earlier. But until then, election uncertainty is likely to weigh on market
sentiment.

We assign the following probabilities2 to the
October election:

  • 10%
    probability of a Macri victory
  • 70% probability
    of a Fernandez win with a generally orthodox policy approach
  • 20%
    probability of a Fernandez win with a hard-left policy bias

While valuations are currently
attractive, in our view, we believe it is prudent to monitor these very fluid political
developments and we remain on hold until more firm policy announcements are
made.

1 Source: Bloomberg, L.P., Aug. 12, 2019.
2 The outcomes mentioned may not necessarily come to pass.

Important
information

Blog header image: Buteo / Shutterstock.com

Sovereign
bonds are bonds that are issued by a national government.

Provincial bonds are bonds that are issues by a
provincial government.

The
International Monetary Fund is an organization of 189 countries, and its
primary purpose is to ensure the stability of the international monetary
system.

The
risks of investing in securities of foreign issuers, including emerging market
issuers, can include fluctuations in foreign currencies, political and economic
instability, and foreign taxation issues.

The performance of an investment
concentrated in issuers of a certain region or country is expected to be
closely tied to conditions within that region and to be more volatile than more
geographically diversified investments.

The opinions referenced above
are as of Aug. 14, 2019. These comments should not be construed as
recommendations, but as an illustration of broader themes. Forward-looking
statements are not guarantees of future results. They involve risks,
uncertainties and assumptions; there can be no assurance that actual results
will not differ materially from expectations.

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