Argentina: Back to Normal

This post is also available in: Spanish

On the August 11th primary elections, Argentines sent an unequivocal message: Mauricio Macri will not be reelected, and his presidency will be a parenthesis between the administrations of Néstor Kirchner (2003-2007), Cristina Fernández de Kirchner (2007-2015), and Alberto Fernández – their former chief of staff – who will almost certainly win the October 27th vote and take office on December 10.

What happened?

The extent of Macri’s loss is hard to overstate: he trailed Fernández by 15 points or nearly 4 million votes and lost in all but two provinces. Further, his ally Maria Eugenia Vidal -until recently considered the most popular politician in the country- did even worse in the primaries and will certainly lose reelection as Governor of the Province of Buenos Aires. Most likely, Macri’s party will only retain the City of Buenos Aires.

A gross underestimation of Mr. Fernández’s level of support in opinion polls led to financial panic the day after his strong showing in the primaries: the peso plummeted, bonds collapsed, and the stock market crashed. This is likely an overreaction, and an attempt to compensate for a cycle in which investors and the Macri administration reassured each other of the possibilities of victory, based on pollsters who told them what they wanted to hear and stoked fears of the disaster a new kirchnerist administration would bring. It all came crashing down after the actual votes were counted.

The fact is Macri lost because his economic record is abysmal: under his watch, the economy contracted for three out of four years, inflation is the highest in 25 years, real wages have dropped, and poverty has increased from around 30% to 35%. The government might rightly point to the serious problems Macri inherited and the brave steps he took to reform the economy, get the country out of default, normalize the exchange market, rebuild shattered economic statistics and reduce an unsustainable fiscal deficit. But in the past four years, the president promised several times that the worst had passed and that his reforms were on the brink of bringing results. Eventually, many Argentines who had backed Macri in 2015 and in the 2017 midterm elections decided they could not afford to keep waiting.

Another key factor was that former president Cristina Kirchner effectively defused Macri’s strategy of polarization by naming Alberto Fernández as the presidential candidate and taking the vice-presidential slot for herself. With Cristina Kirchner in a secondary role, Fernández was able to reunite most Peronist factions (including many of the country’s governors and former presidential candidate Sergio Massa) and turn the election into a referendum on Macri’s performance as president. Anti-kirchnerism is a powerful force in Argentina, but at least part of Macri’s support in previous elections came from those who genuinely believed he was going to tame inflation and restore growth after four years of stagnation during Cristina Kirchner’s second term.

Many in Macri’s coalition warned months ago that the president should not have sought reelection and advised him to anoint another candidate (such as Vidal) in order to build a broad anti-kirchnerist coalition with moderate Peronists. They now blame Marcos Peña, Macri’s influential chief of staff, for isolating Macri from reality and for the misplaced optimism the government displayed until moments before the disastrous results of the primaries came in.

What now under a president Alberto Fernández?

The truth probably lies far from both the catastrophic, Venezuela-style scenario promoted by the Macri camp during the campaign and Fernández’s promise of a return to the prosperous days of Néstor Kirchner. The kirchnerist coalition is mostly composed of poor and lower-middle classes that expect more public spending to boost disposable income and consumption, and domestic industries that are not competitive and therefore need high levels of protectionism and subsidized credit to stay afloat. Powerful labor unions are also among Fernández’s supporters, which means that a liberalization of the labor market or structural reforms to the state apparatus are out of the question.

Under Néstor Kirchner, maintaining this coalition together was relatively easy because 1) the country was coming out of a massive recession and had a very competitive exchange rate; and 2) Argentina benefited from a commodity boom fueled by Chinese demand for its agricultural exports. Fernández might benefit from a version of the first factor, but definitely not from the second one, with a world economy that is showing worrying signs of deceleration among developed and developing nations including China. The next president’s woes are compounded by a debt-to-GDP ratio approaching 100%, extremely high inflation of over 50% this year, an expected growth of only 1% for 2020 (which could be even lower after recent turmoil), and weakened Central Bank reserves.

Fernández also faces a daunting international context. Unlike Macri, he will take office with a complete lack of trust among foreign investors and a possibly rocky relationship with the White House. Personal relations are crucial for Donald Trump, and he has known Macri since before coming to the presidency. Macri made good use of this connection and got US support at the IMF, which helped him secure a 57-billion-dollar bailout. Because of his ideological tendencies and the fact that he defeated Macri, Fernández is unlikely to have that type of access in Washington, even if his protectionist rhetoric is closer to Trump’s views than Macri’s liberalism.

In order to reassure the markets, Fernández vowed to honor all debts and surrounded himself with market-friendly economists such as former finance secretary Guillermo Nielsen. Although the IMF is disbursing more than 95% of the bailout during Macri’s term, it will be up to Fernández to repay it. The new administration has announced that it will renegotiate the agreement in order to spread out payments and relax its fiscal targets, which have already been broken by Macri’s post-primaries economic package that increases subsidies, pensions and salaries and cuts taxes. Like it or not, this means that the dreaded IMF will supervise Fernández’s economic policy.  

Most of Latin America – ruled by governments of the right and center-right – is also going to give a cold welcome to the next Argentine president. In Brazil (Argentina’s largest trade partner and most important bilateral relation) president Jair Bolsonaro said that Fernández’s win is turning Argentina into Venezuela, and Economy minister Paulo Guedes threatened to leave Mercosur if Fernández implements protectionist policies. Fernández responded in kind, calling Bolsonaro “a xenophobic violent misogynist” before turning to a more conciliatory tone. A breakup of Mercosur would be extremely disruptive for both Argentina and Brazil, but the former is clearly the weaker partner of the two. Fernández, therefore, will have incentives to seek accommodation with his neighbor. The recent Mercosur-European Union agreement, however, is now even less likely to see the light of day (much to the relief of French president Emmanuel Macron).

The next Argentine president will also need to make important decisions regarding Venezuela. Fernández has called Nicolás Maduro’s regime authoritarian but needs to placate the most radical and pro-chavista elements of his coalition, led by Cristina Kirchner. Therefore, he will probably leave the Lima Group and withdraw recognition of Juan Guaidó (which will hurt relations with the US) while at the same time maintaining some distance from Maduro. Under this scenario, Argentina’s most natural partners would be Bolivia, Mexico, and Uruguay if the incumbent coalition remains in office. This will be far from the broad support Macri had in Latin America, the US, and Europe.

On domestic and foreign policy alike, the big question is whether Fernández will make decisions himself or if he will co-govern with his influential vice-president. Cristina Kirchner handpicked Fernández as a presidential candidate, remains a very popular (if divisive) figure and will retain direct control over several seats in Congress and over the strategic Province of Buenos Aires through her confidant and next governor Axel Kicillof. Further, her judicial situation is likely to improve soon: Argentina’s judiciary tends to shelve cases when the accused are powerful. She probably read Fernández’s comfortable win over Macri in the primaries as a personal vindication, while her running mate could see it as a mandate for moderation and pragmatism. If Fernández seeks too much independence or turns towards economic orthodoxy, either by conviction or necessity, his vice-president might turn into his biggest foe.

Fear of a return to the authoritarian tendencies of Cristina Kirchner’s second term is not unfounded, but the circumstances are very different. Peronism tends to resist the excessive ambitions of its own: when a leader stops listening and concentrates too much power, some leaders break away and split the party’s vote. This happened in 2015 when Sergio Massa ran as a dissident Peronist and came in third, allowing Macri to reach the runoff against the kirchnerist-backed candidate. That could happen again if Cristina Kirchner attempts to run the show: many provincial governors and Massa himself returned to the fold only because Alberto Fernández will be president, but still distrust Kirchner.

In sum, Mauricio Macri’s failure confirms that there seems to be no politically sustainable way to open up and reform Argentina’s economy. The long-term benefits of liberalizing, improving competitiveness and reducing fiscal spending might be clear in theory, but the immediate social costs of these policies are simply too high for Argentines to bear. Although for many in Argentina and abroad electing Fernández might look like suicide, for the millions who voted for him, it was a matter of self-preservation. 

Some might say that this is a depressing prospect, and they would have a point. For many Argentines, however, it’s back to normal.