Guest post: Gone with the PASO

Leticia Arroyo Abad here, our woman in the Southern Cone.

Argentines have been battling a recession, several mini-crises, and high inflation for a while now. The result was a resounding defeat for the incumbent administration in the recent primary elections.

The primary is called the PASO, for “Primarias Abiertas Simultáneas y Obligatorias.” In English, that’s the obligatory and open simultaneous primaries. Which means exactly what is says. All parties hold presidential primaries on the same day (simultaneous), in which any voter can pick any candidate for the nomination of any party (open), and in which all Argentine citizens are required to vote (obligatory).

Admittedly, the fine is only 50 pesos, which was about US$1.25 before the election, but we Argentines are public-spirited. Or possibly just angry at our politicians. Either way, turnout hit 75%. 

To the shock of precisely no one who was paying attention, unless you include all the people who are paid big money to pay attention, the defeat for the ruling party triggered a massive response in the markets. The following day, “Black Monday”, the peso plummeted to from 45 to 63 pesos per dollar before recovering to around 54. The MerVal index and government bonds suffered massive losses. And things would have been worse had the central bank not intervened promiscuously to prop up the peso. Here are central bank reserves over the past two months:

(Extra credit if you can spot the IMF loan poor President Macri accepted as the markets battered Argentina in mid-July.)

The panic also hit the banking sector. With the plunge of government bonds, a group of foreign banks demanded a buyback from Treasury (as part of an earlier repurchase agreement to boost reserves) that further depleted our national reserves. But hey, what was lost in reserves was more than won in public debt reduction. That is good news, right?

President Macri was not, shall we say, gracious in defeat. With evident anger (or bronca as we say it here), he blamed the electoral results on all Argentines. In a strange technical sense that is true, as in voters do indeed determine election outcomes, but it seemed like he was blaming the crash on the voters ... and that is not generally a good way to win votes. He did apologize for his unfortunate reaction later on.

Trying to get a the solid win over the opposition will be hard, maybe impossible at this point. Nevertheless, Macri is giving it a try. On Tuesday, the President announced a new economic plan. It includes slashing the value added tax on the consumer basket, increasing university grants for students, cutting taxes for small firms, and freezing gas prices, among other things.

The problem is that this administration doesn’t want to be populist. (Or maybe it doesn’t know how?) So the whole package just falls short. And the Argentine people know populism very well; a collection of short-term half-measures is unlikely to fool anyone. Moreover, the government is trying to please God and the devil at the same time. A spending spree, however temporary, will not meet IMF targets. 

Now, as of this past weekend, we have a brand new minister of finance, as the previous one was not happy with the new “populist” detour. Hernán Lacunza believes that the number one priority is to stabilize the peso using the Central Bank’s reserves as “that is what they are for.” 

One week after the shock, Argentina has a new minister of finance, a somewhat stabilized peso, looming IMF targets to meet, and half-baked populist policies to implement. This should keep the President busy but it is highly uncertain that it may buy him another term.

So what will the opposition bring? Well, we can talk about that in another post.

Comments

[J.H.]

Very interesting post.

What would you say the long-term outlook for Argentina is if Macri (somehow) wins? And if he (very likely) loses?

I saw Bolsonaro's economy minister recently threaten to have Brazil quit Mercosur should the Fernandez and Cristina win, with Macron shortly after threatening to block the EU-Mercosur deal over the Amazonian fires. I imagine the blocking of the EU-Mercosur deal would keep things as they are in that aspect of trade, but what if Brazil does quit Mercosur and a trade war starts between Brazil and Argentina?