Argentina | Political tension

Siobhan Morden | September 17, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

The implications of Argentina’s recently concluded congressional primary elections are clear: a popular rejection of radicalism that forces a shift towards moderation. The latest headlines suggest a potential shift sooner than later with internal tensions rising as Kirchnerismo becomes marginalized.  This reaffirms a constructive view on the Province of Buenos Ares’ Buenos’37A, which now offers not only high carry but also the positive optionality of a yearend program from the International Monetary Fund and a gradual shift towards forced pragmatism.

The fallout from the election is still in flux. The Fernandez administration seems divided on whether policy management shifts towards pragmatism or further embraces radicalism.  This has obvious implications for bondholders and voters alike. Both are desperate for a coherent economic program. The elections clearly rejected policy mismanagement under the de facto leadership of Kirchnerismo.  The most logical response would be more election-related stimulus to limit the damage ahead of the November 14 midterm elections. Extreme measures seem unlikely, such as an IMF default, the resignation of Finance Minister Guzman or any other high-risk strategies that may backfire and undermine fragile near-term economic stability.

There are still a flurry of headlines and debate about what’s the next course of action for a Fernandez administration weakened by the weekend elections and facing serious internal struggles.  The medium-term implications suggest a moderate regime change in anticipation of the next more important cycle of the 2023 presidential elections; however,  this any euphoria over this should consider the unpredictability of the near-term policy reaction, the populist bias to minimize damage ahead of the November midterm elections and lingering uncertainty about how the Fernandez administration resolves tension from within the coalition.

First, rule out extremism.  The markets would quickly react as an enforcement mechanism to penalize any policy announcements that would threaten the fragile economic stability.  The Fernandez administration, including rational factions of Kirchnerismo, probably recognize the tight margin of policy flexibility after juggling through the policy challenges of the past two years.  This has played out as anticipated with the 2022 budget, including assumptions of a re-negotiated IMF program as well as reassurance that Minister Guzman would remain in his role as the best compromise candidate to manage difficult IMF relations and the serious economic challenges under the Kirchnerista ideological constraints.

Second, consider the possibility of some near-term populism.  There have already been typical headlines about potential measures to boost household income and consumer spending with minimum social security payments and subsidies to low-income households.  This seems a logical and almost predictable political tactic to source whatever funds possible to accelerate public spending over the next two months.  However, there are clear checks-and-balances against aggressive deficit monetization with almost no margin for foreign exchange intervention, no tolerance for a weaker foreign exchange rate and the subsequent supply shock to prices and negative demand shock to consumption. The bond markets should also exert a moderating influence. Argentina has high dependence on local financing and has clearly benefitted from the recent perception of policy moderation that lowers US dollar demand and allows for central bank US dollar purchases. Minister Guzman recognizes and probably communicates these challenges from within the Fernandez administration.

Third and finally, consider a shift towards near-term moderation.  The Kirchnerista threat to defect with mass cabinet resignations may have backfired with President Fernandez instead exerting control and subordinating radical factions within the coalition.  The hardliners have offered up their resignation with the departure of Interior Minister Eduardo de Pedro among other senior officials with a clear challenge to the authority of President Fernandez. President Fernandez may have accepted the resignation of Interior Minister de Pedro but rejected the other resignations while trying to rebuild internal core support across various political and social sectors.  It is difficult to reinvent a coalition after what has been a dominant reliance on Kirchnerismo.  This suggests mostly paralysis near-term in a weaker and unstable coalition; however, it clearly reduces the influence of the hardliners.

There have been previous episodes back in late 2020 when the markets speculated about a possible moderate policy shift of the Fernandez administration and an effort to distance itself from the hardline Kirchnerista factions. The recent election defeat once again offers another opportunity for reassessment with clear defiance from President Fernandez to resist hardliner pressures and “govern as he deems convenient.”  The open letter of criticism from Vice President Fernandez de Kirchner clearly challenges again the authority of President Fernandez with yet no resolution on the internal power struggle. The near-term focus shifts to the re-appointment of the Interior Minister on whether a moderate (Massa) or radical (Manzur) and how to reach a compromise with a defiant vice president.  The market reaction should hinge on whether President Fernandez reasserts his recent newfound authority that aligns with the voter pushback to radicalism.

There are not many options. The stakes are higher on whether there’s a formal break within the coalition or whether the two sides reach a compromise. It is not clear that Kirchnerismo will accept a subordinated role with what looks like a fragile status quo over the next few months and an unstable coalition in the interim. The markets will likely interpret for weaker Kirchnerismo with declining influence on policy management so long as President Fernandez maintains at least equal authority against Kirchnerismo with critical support among political and societal factions. This should reinforce the year end IMF option and the positive convexity for the sovereign proxy trade in the Province of Buenos Aires.