ASG Brief: Argentina's Presidential Election

 
EXECUTIVE SUMMARY
 
On Sunday, November 22, voters in Argentina will take part in the first presidential runoff in modern Argentinean history. Voters will choose between two candidates – the mayor of the City of Buenos Aires Daniel Scioli of the governing Front for Victory (FPV) alliance, and the governor of the Province of Buenos Aires Mauricio Macri of the opposition We Can Change (PRO) alliance. With the country suffering from a persistent economic malaise, both candidates have sought to project themselves as most fit a chart a different course from incumbent President Cristina Fernández de Kirchner’s economic policies.
 
The election looks likely to be decided by which vision of change ultimately appeals to Argentinean voters – Macri has proposed a sweeping and urgent reform
agenda, while Scioli has promised to pursue a more gradual approach. Macri has the momentum according to recent polls, where he commands a six to eight point lead heading into Election Day. However, polling ahead of the first round of voting on October 25 proved to be inaccurate, leaving open the possibility that either candidate could emerge victorious.
 
We expect that the election will usher in a government committed to a pursuing a more pragmatic economic agenda and rebuilding credibility with global investors, which frayed badly under the Kirchner governments. 
 
  • Outlook for a Scioli presidency: Scioli has sought to strike a balance between maintaining the backing of Kirchner and her supporters as well as staking out his own political space on economic matters. This has largely led him to deal more in vague promises than concrete proposals. He has promised to protect social welfare spending while implementing gradual and pragmatic economic reforms to avoid any economic “shocks.” Scioli is a skilled politician, with a proven track record tackling economic challenges from his time as governor of Buenos Aires province, and—despite his campaign calculations—would likely move away from Cristina Fernandez de Kirchner’s policies as soon as he was installed in the Casa Rosada, Argentina’s presidential palace.
  • Outlook for a Macri presidency: Macri has promised complete and rapid change from Kirchner’s economic policies, although he has also pledged to protect some welfare programs. He has argued for immediate reform, beginning with dismantling capital controls and trade restrictions on his first day in office. Macri would likely face congressional opposition to needed structural reforms—and the political maneuvering required to secure their passage could limit the pace of his agenda.
ELECTION OVERVIEW
 
First Round Results Are a Surprise
 
In the first round of voting on October 25, Scioli won 37 percent of the vote against Macri’s 34 percent. Dissident Peronist candidate Sergio Massa finished in third with 21 percent. The three percentage points separating the top two candidates was a surprise given opinion polls had suggested Scioli would win by a wide margin.
 
In the weeks since the first round, both Macri and Scioli have scrambled to persuade the remaining one-third of the electorate up for grabs, namely the millions of Argentines who voted for the third-place candidate Massa in the first round. While Massa has declined to endorse either candidate, he has at times hinted at his support for Macri.
 
Most recent polls (as of November 16) suggest Macri has continued to build momentum since his surprisingly strong showing in the first round, putting him around eight percentage points ahead of Scioli. Despite the Macri’s apparent lead, the tight result and unreliability of polling data that marked the first round of voting suggest that the result is still very much up in the air.
 
Political Environment is Fluid
 
The results of the national legislative elections held on October 25 highlighted the unpredictable and fluid nature of the current political environment. Kirchner’s Front for Victory won two additional seats,expanding its majority in the Senate. However, it simultaneously suffered heavy losses in the Chamber of Deputies, losing its majority in the lower house. Macri’s PRO, meanwhile, made significant gains in the lower chamber. As a result, whoever wins the presidency will face a divided legislature, potentiallycomplicating efforts to implement reforms.
 
This election has also highlighted emerging rifts in the Peronism political movement, which has been the mainstay of Argentina’s political landscape for nearly 70 years. Sergio Massa’s decision to challenge fellow Peronist Scioli suggests that the political movement may be on the verge splintering in a manner that
could challenge its continued dominance moving forward. Peronism has always been a nebulous movement that unites a broad spectrum of political ideologies, so it is perhaps unsurprising that the more moderate Peronist Sergio Massa would choose to split from the combative, leftist Kirchnerismo camp thathas thrown its support behind Scioli. While the Peronista candidates (Massa and Scioli) still combined to win a strong majority of the popular vote in the first round, their split opened the door to the possibility of the first non-Peronist presidency in decades.
 
Continuity or Change for Argentina?
 
Under the Kirchner administrations of the past twelve years, Argentina shifted to the left in its domestic and foreign policy, while government intervention in the economy became the norm. The result has been a stagnant economy with rampant annual inflation thought to be running above 30% (though reliable data is difficult to obtain), a growing fiscal deficit, and increasing unemployment.
 
Although Argentines want their new president to tackle inflation (according to a Management & Fit poll, the issue is the main concern for 62.9% of Argentinean voters) and chart a new economic course, they seem to desire continuity on Kirchner’s social policies. Almost 40% of Argentines receive a government salary, pension or welfare payments, creating a strong base opposed to spending cuts. Not surprisingly, a recent opinion poll showed that Kirchner has a 42% approval rating, the highest of any departing Argentinean president in decades.
 
Both Scioli and Macri recognize the need to address the current economic policies. Both have promised to seek foreign investment and restore access to the global credit markets to finance infrastructure development and spur growth. Yet the two candidates differ on the pace and depth of economic reform and would face governing challenges unique to their political allegiance, influencing the outlook for each potential administration. Scioli, a pragmatist governor and former head of the Peronist party, has promised to keep the government’s popular policies while gradually implementing necessary economic reforms. As President, he would need to find ways to bridge gaps within the Peronist party, while still showing progress on new economic agenda. Macri, meanwhile, has promised sweeping changes to the economic model, but has also been careful to state that he will not radically cut popular welfare programs – an indication of his understanding that he would eventually need to drive these reforms through a divided Congress.
 
OUTLOOK
 
The Challenges Ahead
 
Given the centrality of the economy in this election, the new president is likely to need to make steady progress on the economic front in order to maintain popular support. The first step is reaching an agreement with the remaining “holdouts”—creditors from Argentina's 2001 default, who have continuously rejected proposals to settle outstanding bonds payments at a significant discount—so that Argentina once again has access to international credit markets. Argentina currently has a relatively low debt-to-GDP ratio (around 40%) but its foreign reserves are low and the country needs additional credit to restore macroeconomic stability.
 
Other critical economic issues that will need immediate action include rising unemployment, high inflation, and the exchange rate gap and currency controls, which discourage investment. Aside from fiscalmeasures, the government could also encourage investment by ensuring the National Institute of Statistics and Census (INDEC) resumes providing accurate, transparent metrics for Argentina’s economy and inviting the International Monetary Fund to resume its annual Article IV consultations (the last such independent “audit” one was in 2006).
 
Outlook for a Scioli Government
 
Scioli is a skilled politician with a proven record of accomplishment tackling economic challenges during his time as governor of Buenos Aires province. A moderate within the Peronist movement, he would likely be more pragmatic than the Kirchners, both in terms of Argentina’s domestic policies and its engagement abroad.
 
Scioli has already proposed number of business-friendly policies and less intervention in the private economy. For example, his economic team has suggested his government could lift export taxes on agricultural goods, currency controls, and take firm steps to tackle inflation. In mid-October, Scioli announced that his economy minister would be Silvana Batakis, the minister of economy for Buenos Aires province during Scioli’s tenure as governor. Batakis turned the province’s chronic fiscal deficit into a surplus through a number of fiscal adjustments, including tax reform.
 
To maintain the support among Kirchner’s core followers, Scioli has to tread carefully. He advocates a gradualist approach to making reforms and rejects dismantling social welfare programs that are popular amongst the Kirchneristas. Scioli has avoided offering clear views on issues that could prove controversial amongst his support base. For example, he has refused to take a position on export tax system or currency controls, though he has indicated his “openness to reviewing the fiscal policies in place.” Scioli has also avoided discussing his plan for resolving the holdout funds issue, though various sources suggest he will support a reasonable deal with holdouts.
 
In terms of his foreign policy, Scioli will likely take a different track than Kirchner, who adopted a strong anti-American rhetoric and cozied up to the Venezuelan government. Scioli has already hinted at more conciliatory engagement with the United States, including a widely disseminated photo with the U.S. Ambassador to Argentina. Scioli has also highlighted the importance of improving relations and increasing trade with its neighbors—particularly Brazil, Argentina’s largest trading partner— which are critical to bolstering the Argentinean economy.
 
Fears that Kirchner could retain significant influence over the Scioli administration—due to the presence of a number of her key advisers on Scioli’s team—may be exaggerated. Scioli is a skilled politician, well aware of how the Argentinean system works, and is certainly capable of steering the country as he sees fit. As president, Scioli would control the levers of power and the purse, including the redistribution of fiscal revenues to the various provinces. This control over the provinces in turn leads to control over legislators, who frequently defer to provincial party bosses. Moreover, Kirchner chose not to run for another elected position (e.g., governor of Buenos Aires or senator), limiting her influence and relevance in this political structure.
 
The most prominent risk Scioli would likely face is one inherent to his gradualist approach – should meaningful reforms take too long to materialize in the wake of the election, his honeymoon period may quickly give way disillusionment among an Argentinean electorate hungry for improvements to the country’s economy.
 
Outlook for a Macri Government
 
Whereas Scioli has promised incremental changes, Macri offers the promise of complete change from the Kirchner years and, as noted, the end of the Peronist control over Argentina’s government. The outgoing mayor of Argentina’s capital has pledged immediate reform, beginning with dismantling capital controls and trade restrictions on his first day in office. Unlike his opponent, over the course of the campaign, Macri has provided a number of detailed policy prescriptions—particularly on economic issues—that give considerable insight into his agenda as president.
 
As president, Macri would likely immediately seek to steer an economic course that rapidly allows the government to relax trade and currency controls, while being able to curb inflation. He has also indicated a desire to work toward reaching a "quick" resolution with the remaining holdout creditors from Argentina's 2001 default. He has also emphasized the need to increase Argentinean competitiveness and aggressively pursue foreign investment to rebuild the Argentinean economy. Nevertheless, Macri has stated he does not intend to create severe shocks, as had been the case in prior governments. For example, he has argued that lifting the currency controls implemented in 2011 would allow the peso to find an equilibrium between the current official exchange rate (near 9.6 pesos per USD) and the black market rate (where the peso sells for as little as 15 pesos per USD), which would not significantly change the average price Argentines pay.
 
Beyond his domestic economic platform, Macri would also likely move the country’s foreign policy away from the leftist rhetoric that has characterized the Kirchner governments. He has already stated he would seek Venezuela’s suspension from Mercosur due to that country’s violations of civil liberties, namely the jailing of political opponents to President Nicolas Maduro. Macri has also promised to improve Argentina’s relations with its immediate neighbors, particularly stating he would seek “the best relations with the current president of Brazil” and that “what is best for Brazil, is best for Argentina.”
 
Macri has refused to name his economic team before November 22, but his key advisors all favor the fiscally conservative, market-friendly approach Macri has championed on the campaign trail. Macri recently stated that he wants “a minister of Economy with less power,” perhaps signaling that as president he would take a strong guiding role in economic policymaking. Macri has also indicated his intent to create a standalone Ministry of Energy (the energy portfolio is currently a secretariat within the Ministry of Budget and Planning) and to separate the Interior and Transportation portfolios into separate ministries (see Appendix for additional information).
 
Although Macri would enter office facing a strong Peronist opposition in Congress, likely limiting the pace of reform, the considerable clout of the presidency in Argentina would work to his advantage. Through his control over the distribution of revenue to the regional governments, Marci could likely cajole and buy the support he would need. As the former mayor of Buenos Aires, Marci is familiar with this system and should be able to leverage these spoils to secure the passage of needed reform, even if political necessity may force him to move more gradually than he would prefer.
 
Given the effort most likely required to push economic reform through a divided legislature, Macri could find himself with little political capital for anything else at the start of his term. Although Macri promised to end endemic corruption during his campaign, a prominent party ally was recently caught up in a graft scandal—leading many Argentines to wonder if he will follow through. It is unclear just how far Macri will go in terms of improving transparency and accountability and strengthening the country’s institutions.
 
Macri undoubtedly represents the most change for Argentina. Although he may find governing more difficult than campaigning—particularly with an opposition Congress—the momentum and optimism surrounding Kirchner’s departure gives Macri an excellent opportunity to push for structural and market-friendly reforms.
 
CONCLUSION
 
Despite the differences between Scioli and Macri, it is clear that regardless the winner, Argentina is in urgent need of reforms to find the path back to economic growth and international credibility. Scioli’s challenge will be establishing himself as his own person, and not only Kirchner’s successor, and finding support within a fragmented Peronism to enact economic reforms. Macri’s challenge will be facing a Senate with a Peronist majority, as well as pacing the implementation of what will certainly be unpopular economic measures in order not to lose popular support. Still, both candidates seem to understand this is a crucial moment for Argentina and have demonstrated a desire to put Argentina on a new path, following twelve years of Kirchner governments.
 
Attachment: Please see Appendix for an analysis of each candidate’s expected economic team.
PDF icon 2015 ASG Brief - Argentina Presidential Election.pdf