What’s in Store for Post-Kirchner Argentina?

12.12.14

What’s in Store for Post-Kirchner Argentina?

12.12.14
Cristina Kirchner

By Alexi Hastings for Global Risk Insights

The clock is ticking. The hold of Peronism and its brand of leftist populism on Argentina’s government may come to an end in October next year. Whether President Cristina Fernández de Kirchner’s party Partido Justicialista (Justice Party) prevails will very much depend on its response to continued stagflation and monetary policy challenges in 2015.

The crowds that gathered outside La Casa Rosada in November 2014 protested Argentina’s spiralling inflation and crime and banished any thoughts the president may have had of amending the constitution and running for a third term.

With inflation of 40% and significant disparities between official dollar rates and over the counter terms of exchange, the economy is ailing and the central bank can only take so much pressure.

Slowing demand from China weakened the commodity boom that fed Latin American economies for much of the decade up to 2010. Yet, Argentina is not as dependent on commodity exports as other states, notably Venezuela, and the country is actually a net importer of fuel.

Together with the global slowdown, the government’s economic policy-making must share the blame. Protectionism, foreign exchange controls and attempts to shore up public sector employment by printing money are the main culprits. Runaway inflation has ensued, productivity has suffered and the budget deficit has widened.

Moreover, there is Argentina’s position in (or absence from) global capital markets. The default on sovereign debt in August this year prolonged a saga that began in 2001 and further ostracised the country, and Ms. Kirchner, as the pantomime villains of financial markets.

Many observers now see January 2015 as an opportunity to rectify the stalemate given the 31 December expiry date of the ‘rights upon future offers’ clause which prevented Argentina from paying holdout creditors without also paying those which accepted restructuring in 2005 and 2010.

A resolution, and access to international debt markets, would be very welcome, especially since the government has seemingly learned to stop leaning on the central bank and its already thin reserves.

Beyond this, the Justice Party must undertake infrastructural change if Argentina is to turn around its alarming set of economic indicators and optimise its significant energy resources.

Indeed, the country is home to enormous shale oil and gas reserves discovered in the Vaca Muerta formation in Neuquén province. Kirchnerism has not inspired confidence that such changes will be made.

The 2012 nationalisation of YPF from the private ownership of Spanish energy firm Repsol does not encourage foreign investors that their capital is secure, nor are they confident that they will receive a fair share of profit (especially since the repatriation was reportedly made shortly after Repsol had discovered the bountiful reserves).

Yet, it is increasingly foreign capital that the country needs to maximise its return and to achieve self-sufficiency within the next 10 to 15 years. Energy reforms have been made and American group Chevron (among others) has signed up to invest in Vaca Muerta.

However, others are less confident that a political party subscribing to the protectionism of Peronismo can make such a volte-face. They will look to the October 2015 elections for confirmation of Argentina’s future direction.

Three candidates stand out as contenders for the first non-Kirchner president in over a decade (The president’s husband Nestor was elected in 2003 and died in 2007).

Among them is Daniel Scioli of the Justice Party and current Governor of Buenos Aires. Although his relationship with the incumbent president is said to be difficult, and he has talked of ending populist protection, his election would clearly be closest to a continuance of the Kirchner regime.

A former Partido Justicialista member, Sergio Massa, has since split from the party in an attempt to distance himself from an unpopular government. This may be a wise move, but Mr. Massa has thus far been more personality than ideas and there remain loyal Peronists to derail his campaign (though their support will depend on the health of the economy in 2015).

The most likely break from left-leaning, anti-market politics would come from Mauricio Macri of Propuesta Republicana. A conservative politician and businessman, Mr. Macri is most likely to break the Peronist dominance of Argentine politics and offer a positive signal to international investors.

The pot bangers of 2001 that ushered in a new era of populism in Argentina now demand an alternative to Ms. Kirchner’s economic policy and her Justice Party has two opportunities to redirect the country in 2015.

First, there are the negotiations over the sovereign debt dispute, expected to restart in January.

Second, there is the significant wealth of natural resources that may establish the country as a self-sufficient energy power.

The question remains: can the current government calm inflationary pressures, re-enter capital markets and bring the deficit under control? If not, an alternative to Peronism may lie around the corner in October 2015.

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