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For the first time in the nation’s history, the Province of Buenos Aires, the City of Buenos Aires (photo) and the Federal Government could be ruled by the same party. (photo: Luis Argerich)
Wednesday, November 4, 2015
Perspectives

Argentina: Realignment

Argentina is about to return to its former spot as one of the great economies of Latin America.

BY WALTER T. MOLANO

Pundits often argue that polls are more of an art than science. If that’s the case, pollsters must be in a creative rut. Last year, they failed to predict the outcome of the Scottish Referendum. Last week, all of them, except for one small company, failed to anticipate the strong performance by former Buenos Aires Mayor Mauricio Macri during the Argentine presidential elections.

It’s not clear what is leading to the mistakes. The problems could be methodological. Statisticians claim that pollsters rely too much on fixed-line telephone interviews. It is easy to obtain the socio-economic dispersion of residential fixed-line owners. However, such information is almost non-existent for cellular users. The problem is that fixed lines are being replaced by cellular telephones. Others argue that voters are keeping their cards close to their vests, and not expressing their true intentions until they are at the ballot box.

VOTE OF DISPLEASURE

Whatever is the case, Argentines clearly expressed their displeasure with the current set of policies. As a result, more than 60 percent of the population voted against former Governor Daniel Scioli. He lost most of the polling districts in his home province of Buenos Aires. He also failed to win the large grain growing provinces, such as Entre Rios, Santa Fe, Cordoba and San Luis. It was clear that the electorate wanted change.

Instead of banding together, the Scioli camp splintered as soon as the results were announced. There were scathing recriminations against the Campora, the Peronist youth movement. Some said that the senior leadership was more focused on dividing the spoils of government positions rather than campaigning. Sensing a sinking ship, many mayors and local officials immediately began switching sides. There was a rather vague attempt at damage control. Overtures made to the Sergio Massa camp were swatted away. Ever since he had declared his candidacy, the former Chief of Staff for President Cristina Fernandez was belittled and criticized by Scioli and his followers. The press reported that former Economy Minister Roberto Lavagna, a member of the Massa camp, had been offered to return his old position. However, he dismissed the approach. Scioli even agreed to participate in a televised debate, even though he refused to join a similar exchange a month ago. Given his desperate condition, there are rumors that he may throw in the towel before the next round. That is what former President Carlos Menem did in 1999, when he was running against Fernando De la Rua. Menem’s rejection rate was so high, that he knew he could not win. Therefore, people are turning their focus on Macri, the future leader of Argentina.

SHOCK THERAPY

Macri’s approach will be macro-economic shock therapy. He promises to float the currency and remove energy subsidies soon after his inauguration. Led by a team of brilliant economists, Argentina will restore its links with the international financial community. It will revive its relationship with the IMF and World Bank, settle with the Holdouts and return to the international capital markets.

The outgoing administration will try to pass him a poisoned chalice. Huge distortions hobble the Argentine economy. Although international reserves are said to be about $27 billion, the central bank’s coffers are really empty. The last source of liquidity has been swap lines tendered by the Chinese in order to allow the government to remain afloat. In order to stem a run on the currency, the central bank has been selling dollars forward. The contracts, which are settled in pesos, trade well below the dollar-blue market, creating a huge arbitrage opportunity. With an open interest of more than $12 billion, it is also an enormous contingent liability for the government, once the currency is devalued.

The assortment of land mines that the Fernandez Administration left behind will be a formidable challenge for whoever wins. It is true that Argentina is about to embark on a change of direction that will allow it to return to its former spot as one of the great economies of Latin America, but a lot of work and perspiration lies ahead. It will be very painful for most households, corporates and investors.

Yet, one essential element will be working in the government’s favor. For the first time in the nation’s history, the Province of Buenos Aires, the City of Buenos Aires and the Federal Government will be ruled by the same party. This will imbue the executive branch with an overwhelming capacity to overcome most obstacles.


Walter Molano is head of research at BCP Securities and the author of In the Land of Silver: 200 Years of Argentine Political-Economic Development. 

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