JP Spinetto: As Argentina turns right, prepare for turbulence
Argentina’s economy is expected to shrink by more than three percent this year, and its inflation rate is at a three-decade high of 114 percent. And yet its S&P Merval stock index is the Lionel Messi of markets — which is to say, it’s the best performer in the world, up almost 50 percent this year in dollar terms. The reason for such investor optimism is clear: one of Argentina’s frequent ideological turns is imminent. While a lot can happen between now and the presidential elections in October, it’s likely that the next Argentine government will be more business-friendly than the Peronist left-wing coalition that has governed the country for four chaotic years. It’s a safe bet, particularly given some extremely cheap asset prices. But the path to stabilise South America’s second-largest economy won’t be easy. Start with the candidates: the main Peronist coalition’s last-minute choice of Economy Minister Sergio Massa as its presidential candidate helped boost the country’s asset prices on Monday. Massa didn’t improve Argentina’s economy much during his almost year-long tenure — in fact, inflation accelerated, international reserves continued to drop, and byzantine currency controls expanded. Still, he is seen as a more business-friendly option than the openly business-hostile group led by former president, current vice-president and all-too-influential powerbroker Cristina Fernández de Kirchner. With campaigns for the August 13 primaries already underway, the centre-right opposition of Juntos por el Cambio leads in early polls — even though it still has to pick its presidential candidate. The Massa-Fernández de Kirchner coalition is in second, followed by the libertarian group led by Javier Milei, who shook up the race early but seems to have lost momentum recently. In the current economic and political climate, note JPMorgan Chase & Co economists Diego Pereira and Lucila Barbeito, it will be hard for the Peronists to retain power. Despite all this uncertainty, there are reasons to be optimistic about Argentina’s economic outlook. The country should have recovered by 2024 from the damaging drought that has reduced its crop and exports this year. And the next president will benefit from two of the few policy successes of current President Alberto Fernández: an increase in hydrocarbon production (which reduces the bill for government energy subsidies) and a mining boom, particularly in lithium. A better regional environment, with lower interest rates and a growing economy in Brazil — Argentina’s main trading partner — will also help. At the same time, the policy details will matter. And, as Argentines know all too well, things can always be worse. As I have argued, Argentina’s economic problems aren’t fated by the gods but are due to simple policy malpractice, which stems from political infighting. The next government will have to introduce rationality and restore market mechanisms, including an overdue devaluation of the peso. Juntos por el Cambio is divided between those who favour shock therapy (represented by former security minister Patricia Bullrich) and those who support a more consensus approach (headed by Buenos Aires City Mayor Horacio Rodríguez Larreta). As in 2019, the primary election will show how political forces are aligning — including if it’s Bullrich or Rodríguez Larreta who head the Juntos coalition — and therefore how sustainable the current market rally is. One thing’s for sure, though: To change the status quo, the next government will need to spend some political capital — and have the skill and willingness to negotiate with the opposition. As the government of Mauricio Macri learned in 2015, economic reform increases the risk of social conflict. Argentina’s economy appears to be on the mend, and investors are cheered by the emergence of Massa’s candidacy. But Fernández de Kirchner will almost certainly retain influence in Congress and in Buenos Aires Province, the country’s largest electoral battleground. It’s too soon to say that Argentina has turned the corner.