Voters in Argentina relegated the market-friendly agenda of Mauricio Macri to the dustbin of political history on Sunday, as Alberto Fernandez swept to victory collecting 48% of the vote and avoiding a runoff.
The result was expected – a landslide loss for Macri in an August primary suggested the country had seen enough and was prepared to pivot back to Peronism under the Kirchner-allied Fernandez.
Macri did manage to narrow the gap to “just” eight percentage points from 16 in the summer primary, which plunged the country into a new currency crisis and led directly to one of the worst one-day equity routs in the history of markets.
Read more: In Argentina, Total Meltdown
The central bank on Sunday imposed far stricter currency controls, with savers limited to just $200/month in dollar purchases, down from $10,000 under the measures announced on September 1.
Clearly, these kind of draconian efforts to protect reserves could lead to a dramatic decoupling of the blue chip rate, which slid to its weakest ever in the run-up to the vote.
“Should currency dynamics persist, further FX controls should be needed to stabilize international reserves, which fell ~USD20bn since the primaries”, BNP wrote late last week, adding that the restrictions announced in September “seemed to have had little impact on retail investor flows with around 98% of them buying up to USD10,000”.
Writing Friday, BofA’s LatAm FX strategists warned that the most recent FX mini-crisis made a new tightening of currency controls likely. “BCRA sold $700mn yesterday and was offering $800mn today”, the bank said, adding that “international reserves are down $4b in 30 days (net reserves at $13bn)”.
Macri’s better-than-expected performance (much better by many accounts) suggests the country’s political future might be more balanced than the August primary tipped.
“His loss notwithstanding, President Macri can find some comfort in the significant improvement in his performance”, Goldman said Monday. “Equally important, Mr. Macri and the Juntos por El Cambio coalition had a solid showing in some of the largest urban centers across the country, including the capital Buenos Aires… suggest[ing] that the conservative movement may have secured a solid political platform to reestablish itself as a vocal opposition block and as a viable alternative to Peronism”.
Still, it won’t matter much to markets in the near-term.
“In the short run the market will likely be driven by the management of the currency crisis in coming days, speed of reserves decline and the confirmation of the economic team and the balance of power in the cabinet”, BofA said Monday, adding that it’s probably not realistic to expect a “significant market recovery in the short term and the extreme tightening of the capital controls are a signal of the gravity of the crisis, which in turn could cause concern among locals”.
Fernandez picked a fight with fascist Jair Bolsonaro right off the bat, calling on Brazil to free Lula, the iconic left-wing leader jailed in the yearslong Carwash probe which swept up dozens upon dozens, produced more than 100 indictments and recovered billions in public funds.
Lula got a jail visit from Fernandez in July, and called for his release during the campaign.
In August, Bolsonaro suggested that a Fernandez victory could cause an exodus of people from Argentina. “I have no problems having a problem with Bolsonaro”, Fernandez quipped. “I am glad Bolsonaro speaks ill of me. He is a misogynist, racist and violent”.
That he is. But something he isn’t is amused with Fernandez calling for Lula to be freed. Bolsonaro said Monday he won’t be congratulating Argentina’s new leader, but didn’t indicate that he would immediately seek conflict.
It’s at least possible that Bolsonaro tries to pull Brazil out of the Mercosur trade pact with Argentina, Paraguay and Uruguay in response to Argentina’s pivot back towards left-wing populism.
Markets will also been keen to see how much sway Kirchner actually has in the Fernandez government.
Goldman doesn’t strike a particularly optimistic tone. “Despite his convincing political victory, it is far from clear if Mr. Fernandez has the will and/or the flexibility to implement some of the unpopular measures that are required to put the Argentine economy back on track”, the bank remarked after the election. “After all, the results of the general elections have determined a redistribution of power away from orthodox and conservative forces towards the more heterodox/populist end of the political spectrum”.
That, Goldman warns, “is fertile ground for political and policy missteps”.
