IMPACT

Back to the future. The poll returns the Peronist party to power after a rare, six-year absence atop Argentine politics. It also caps a stunning comeback for former president Cristina Fernández de Kirchner, who ran as Alberto Fernández’s vice presidential candidate and is believed to be a powerful player behind-the-scenes. De Kirchner is a divisive figure in Argentina; loved by some for her interventionist, poverty-focused policies during her time as president from 2007-2015, and hated by others as a corrupt figure who’s largely responsible for the economic peril that the country now finds itself in. It was presumably this divisive aspect that kept de Kirchner from claiming the top billing on the ticket. There were fears that the potential market blowback and de Kirchner’s legal troubles could combine to sink the Peronist Justicialist Party’s presidential push, but with the benefit of hindsight these fears now seem unwarranted given the series of economic and political self-inflicted wounds that characterized the Macri campaign.

De Kirchner faces several allegations of corruption stemming from her time in power as president, and in some cases the legal proceedings are ongoing. She has yet to be found guilty, but some of the case details – for example, a safety deposit box with $4.6 million stashed in it – would appear somewhat damning on the surface.

Argentina’s economy in disarray. Argentina’s faltering economy is ultimately what doomed President Macri, ushering in the Peronists’ return to power. The voting public was initially willing to give Macri’s business-friendly approach a try, even reluctantly acquiescing to a record bailout from the detested International Monetary Fund (IMF), but in the end it all seemed to make no material difference in many people’s lives.

Now the economy has become the Peronists problem to deal with – and what a colossal problem it is. The Argentine peso has been on a white-knuckle rollercoaster ride for years now, dipping further in the lead-up to an expected de Kirchner administration; inflation spiked to over 50% after the August primary; unemployment stands at around 10%, youth unemployment is north of 20%; and a staggering one-third of the country’s population lives in poverty. In addition, the Argentina’s fiscal position has eroded substantially under the Macri administration, which borrowed heavily and often in vehicles denominated in foreign currency, including under the auspices of the IMF bailout that was negotiated by the Macri administration. Now Argentina faces some $100 billion in foreign debt bills, paltry reserves, and all with no signs of economic growth on the horizon.

One small positive in all this is that most of the market reaction from a Peronist victory is already baked in. In political terms, the writing has been on the wall since Macri’s sweeping defeat in the August presidential primaries (a period that coincides with a further 30% drop in the value of the peso as investors abandoned ship). And in an indication of how bad the situation has gotten, one of the first policies announced following the election results being made public was the imposition of a monthly purchase limit of just $200 USD per citizen. Before the election, the limit was $10,000 USD, and the change reflects growing concern about Argentina’s dwindling forex reserves.

FORECAST

De Kirchner is often portrayed as the boogeyman by big business. However, this new administration might not actually live up to the billing. For one, Alberto Fernández, who, after all, technically gets final say on policy matters, represents a moderate with a demonstrated record of ruling via compromise. He is known for guiding Argentina through its debt restructuring in 2005, and he posted primary fiscal surpluses from 2003-2007 as cabinet chief to the late president Néstor Kirchner. Even the ostensibly more radical de Kirchner handed over a much more functional economy in 2015 than she’s about to receive in December. Ironically, it was under Macri – the harbinger of austerity – that Argentina was bankrupted and set upon the road to another default (to be fair, macroeconomic events outside of Macri’s control also made a significant contribution).

Past precedent is one factor suggesting moderation. Another is the political dynamic that the new administration enters into. Put simply, this administration will enjoy substantial political cover should it advance policies that seem counter-intuitive to the Peronists’ social justice mandate, at least over the short-term. For one, the Argentine economy is by many metrics in a state of near collapse and, importantly, this state of affairs is not (totally) of the new administration’s making. Moreover, while it’s hard to overstate the disdain that most Argentines feel toward the IMF, the heavy-lifting of approaching the organization and negotiating a bail-out has already been carried out by the Macri administration. Thus, the Peronists can continue with and modify the IMF program without having to stake their own political legacy in the process, at least initially, and de Kirchner has indicated a willingness to work with the organization. (Incidentally, there are some who believe that the IMF has a lot to learn about stabilizing distressed economies, evident in its failure to rescue Argentina despite a staggering $65 billion in assistance). In sum, we may see a Peronist administration that, at least in the early days, closely resembles that of Macri’s while it tries to stabilize Argentina’s short-term economic outlook. Only later in the presidential term will it turn to its social justice mandate, much like the case of Greece’s SYRIZA, which shed much of its radicalism upon being swept to power amid economic crisis in 2015 and made a partial (and ultimately doomed) return to social activism in the lead-up to this year’s election.