Argentine Electoral Landscape Tightens Between Leading Candidates Ahead of Presidential Election; Economy Could Rebound in Second Half, Improve Macri’s Chances

The uncertainty regarding who will take over the reins of Argentina’s economy after the October presidential elections continues to grow as the latest polls indicate that the contest between the two leading tickets is getting closer. Although the center-left Peronist Frente por Todos party backed by former President Cristina Kirchner continues to hold the upper hand, most polls show that its lead has narrowed to a four- to five-percentage-point margin over incumbent pro-market President Mauricio Macri’s Cambiemos coalition.

The change is partly explained by the decision of both political parties to pick accompanying candidates who move their ideological position to the center of the political spectrum. Kirchner’s choice of one-time critic Alberto Fernández to lead her party’s ticket as its presidential candidate and Macri’s pick of long-time Peronist Miguel Pichetto to join him as his coalition’s vice presidential candidate have softened their positions.

“Fernández will implement policies that are realistic and clear, as he knows he needs Wall Street and Washington, D.C., on his side. [Fernández] will take this into account when launching economic policies,” Argentina’s former Finance Secretary Guillermo Nielsen told Reorg. The economist, whom Fernández consults regularly and who is viewed as a top contender to lead Argentina’s economy ministry if the Peronist candidate wins the presidency, did not want to provide policy details but emphasized that he understood the importance of the first 100 days of the administration. “It will be a battle to generate confidence and that will depend on the measures that are implemented,” Nielsen explained.

But while the economist, famed for renegotiating Argentina’s debt with the International Monetary Fund in 2005, hinted at a more moderate position, the differences between the two leading tickets remains wide.

On the one hand, Fernández has promised to renegotiate debt with the IMF and bondholders, replace dollar-fixed electric utility tariffs with a peso rate, reject the Mercosur-European Union trade deal and implement a more protectionist model and could be open to reintroducing capital controls. On the other hand, Macri said he will carry out his proposed economic reforms even faster, such as slashing the budget deficit to zero, cutting export taxes, deregulating the energy market and reforming the pension system.

Potential Sector Effects

If a Peronist administration were to return to power, Argentina’s electricity sector would be most at risk. Pampa Energia and Edenor, for example, witnessed significant growth since the beginning of the Macri administration, after he allowed tariffs to surge over 10x during his tenure. But Fernández’s promise during a recent TV interview to fix electric utility tariff rates to the peso and evaluate putting price controls on them as a consumption policy measure could seriously affect these companies’ earnings. The picture for companies belonging to other sectors, however, such as Argentine state-owned oil and gas conglomerate YPF, real estate firm IRSA or financial services firm Banco Macro, is less clear.

In terms of the oil and gas sector, Macri, for example, remains committed to deregulating the market and promoting business-friendly policies despite having to cut natural gas subsidies, freeze tariff increases and increase export taxes to meet the fiscal adjustment goals it agreed to with the IMF. However, while Fernández has said he wants to promote policies that increase investment in oil and gas sector, if he fixes electricity tariffs to the peso it could negatively affect the natural gas industry, which is the main source for the generation of electricity in the country. This effect is because power generators buy natural gas from gas producers and if power generation companies determine that they are not earning an adequate return on their investments, they may curtail natural gas purchases.

Regarding the real estate and the banking sector, both IRSA’s shopping malls and Banco Macro could benefit from Fernández being more in favor of implementing short-medium-term policies that would promote consumption via easier and cheaper loans and other consumer-oriented policies supported by extra money from relaxing the IMF’s stringent budget-balancing goals. These consumer-friendly policies, however, could backfire if Argentina cannot meet the IMF’s objectives or the market loses confidence over too much of a preference for consumption-oriented policies over balancing the budget, leading to a return to capital outflows, exchange-rate volatility and sharp depreciations.

Pampa and YPF tear sheets are HERE and HERE, respectively. A deep dive on power producer MSU Energy is HERE.

YPF’s $1 billion 6.95% bonds due 2027 are quoted around 90/91, with a yield to maturity just over 8.5%, up from around 87.5 on April 8. Pampa Energia’s $750 million 7.5% bonds due 2027 bonds are quoted at about 92/93 to yield just under 9%, compared with 89 when the bonds were being bid three months ago. The one-year price performances of YPF’s and Pampa’s 2027 bonds are reproduced below:
 
MSU Energy’s $600 million 6.875% bonds due 2025 are quoted in the mid-70s, which is around where they were trading three months ago but an improvement from the mid-60s in early May.

IMF Loan

Nielsen told Reorg that no matter what, he would renegotiate the debt agreement with the IMF. “The debt in 2020 isn’t so much of a problem; it’s in 2022 to 2023, that the amount of debt maturing is too much to pay. We need to refinance and extend the maturities,” Nielsen said.

Argentina has a more than $57 billion stand-by loan with the IMF - the largest in the multilateral organization’s history. In 2020, the government will have to roll over $11.1 billion in the market and $4.2 billion in new debt. In 2022 and 2023, Argentina will have to pay back $45 billion of the total $57 billion it borrowed from the IMF between 2018 and 2020.

Andres Asain, director of the Scalabrini Ortiz Economic and Social Studies Institute in Buenos Aires, posited that if Macri were to win a second term he would have to restructure the debt but noted that the terms would be more beneficial to creditors than a Peronist negotiation. “If Macri handles the negotiations they will accept the demands of the funds, but it wouldn’t be economically sustainable. But with a potential Fernández government the IMF would have to resign itself to more moderate fiscal cuts,” Asain said to Reorg.

He said he believes that a Peronist administration “would request a haircut over the debt in exchange for giving something to the bondholders in the medium term so [Argentina] do[es] not default,” Asain said to Reorg. Ricardo Sigwald, ex-consultant of the CAF Latin America development bank, said he thought, however, that a Fernández government would only renegotiate with the IMF and leave the private outstanding debt alone.

Capital Controls

Another fundamental difference between the two opposing parties are their positions on capital markets. Fernández, who was once critical of the use of capital controls by the Kirchner government, has recently suggested in an interview that he is now more open to using them. “When I review capital controls and compare it with the cost we paid in the Macri era, it was less worse than taking on debt with the IMF,” the Peronist presidential candidate said in an interview with the daily La Nación. However, when a team from the IMF recently visited Argentina and met with Fernández, he expressed to them that they would not be implemented. It is an issue that seems to be still up for debate. Nielsen told Reorg that he was strongly against the use of controls, saying he believes such policies would be a grave error that would make it more difficult to renegotiate the debt with the IMF, highlighting that it would not have any role in a future Fernández government.

The implementation of capital controls to control the Argentine peso’s stability instead of using foreign exchange to support the peso could affect various trade agreements that the Macri government has struggled to achieve, such the Mercosur-European Union agreement as well as the inclusion of Argentina in the MSCI index and a recent airline flight service agreement with the United States that opens up the market to joint ventures.

The Kirchner party has always supported a fragmented foreign exchange market, according to Carlos Abadi, managing director of the financial advisory firm Decision Boundaries. Abadi is certain that restrictions to capital would most likely return under a new Fernández administration. “We can expect a lower rate for the market, and a second higher foreign exchange rate similar to the black market during Kirchner’s last tenure,” Abadi said when consulted by Reorg. However, whether the IMF would permit a potential Fernández administration to impose them is “another matter,” he added.

Enrique Mantilla, president of Argentina’s Chamber of Exporters, predicted that no matter who wins the next presidential elections, the succeeding administration would have trouble implementing any plan. “There is an important structural problem that won’t give any government a wide margin to operate,” Mantilla told Reorg. Although the chances are high that the Fernández administration will use the same economic recipes, they will also have enormous limits that will not let them advance greatly in this regard, he added. Mantilla said he believes that under a Kirchner government, economic policies in favor of boosting consumption were backed by money printing, but now things are different “because there isn’t any.”

Recent Economic Trends and Forecasts

The current state of the economy is also playing a key role in the electoral landscape ahead of presidential elections. The sharp peso depreciation seen last year, which drove the local currency to lose more than half of its value amid high levels of inflation, led to a 10% to 15% decrease in local purchasing power, which undermined Macri's reelection plans as the economy sank into a depression. At the same time, this has helped opposition contenders for the country's presidency such as former Economy Minister Roberto Lavagna, who has won supporters, while Cristina Kirchner also saw her popularity levels grow as the economy worsened.

The overall economic situation, inflation and unemployment rank among the top five issues of concern of the population, according to a recent poll from Opinaia. Although the annualized inflation rate as of May was 57%, the metric is trending downward, driven by the efforts undertaken by the monetary authority to curb inflation. Meanwhile, the economy sunk 5.8% during the first quarter compared with the same period a year earlier, according to data from the National Institute of Statistics, or INDEC. Some local analysts argue that the economy hit bottom and that without any “bad news” from the external front, the government could continue recovering some of the ground lost in polls after the economic and financial turmoil last year.

Following the central bank’s announcement in April to ease limits in the foreign-exchange intervention-zone strategy to avoid further peso devaluation, the country’s risk premium continued tightening as investors’ expectations improved on the capacity of the government to control inflation. The country’ risk premium, as measured by the JPMorgan Emerging Markets Bonds Index, or EMBI+, contracted to 783 points as of Friday, down from 963 before the announcement, helping the local peso to stabilize and reduce volatility in the foreign-exchange market.

Expectations surrounding inflation and other macroeconomic indicators are becoming increasingly positive heading into presidential elections in October and the second round, or ballotage, in November. The local inflation rate is expected to continue on a downward trend as of June, to reach a 2.6% monthly rate and 40% for 2019 by year end, according to the market expectations survey from the Central Bank, or REM. The poll gathers economic and financial forecasts from 54 participants, including 33 macroeconomic consultancy firms and research institutions, 14 local financial entities and seven foreign entities following local developments.

During April and May, monthly inflation reached 3.4% and 3.1%, respectively, after peaking at 4.7% in March, according to INDEC. If the current macroeconomic environment persists, the consensus is that the inflation rate would continue on a downward trend to reach 2.2% by December, according to the REM. The forecast for monthly inflation rates for the period June-December, as expected by market participants under the REM, is reproduced below:
 
The same poll shows that the economy may have reached bottom during the first half of the year and notes that it anticipates an improved performance for the second half this year and during 2020. For the second quarter of this year, expectations are that the economy will grow 0.7% sequentially, down from 1% estimated during the same poll in May, while expectations are 0.5% and 0.4% growth for third and fourth quarter of the year. The economy is expected to contract 1.4%, compared with a 1.5% contraction expected during the same survey as of May, and a positive 2.2% GDP growth for 2020, up from the 2% surveyed in May. The evolution of quarterly GDP growth and forecasts for the remaining of the year are shown below, according to consensus from the REM:
 
Projections on the monetary-policy interest rate are also declining in the most recent REM poll. As of June, market participants said they expect the average peso-denominated LELIQ rate to reach 61.65% in July, down from 67.9% sequentially, and to reach 55% as of the end of the year. The lower interest-rate environment for the remainder of the year combines with lower exchange-rate levels than expected a month ago during the REM poll as of May. The expected exchange rate level for July is 44.1 Argentine pesos per U.S. dollar, according to the latest REM, down from ARS 46.9 a month earlier, and ARS 50.2 as of the end of the year, compared with ARS 51 a month earlier. A lower interest-rate environment and an exchange rate depreciating at below inflation rates for the year entails lower tensions in the foreign-exchange market.

Other look-forward indicators might be showing improved performance of the local economy going forward. The leading index from the Universidad Torcuato DiTella is an early-sign index that anticipates changes in the economic cycle: The index continues showing year-over-year figures, contracting by about 15% in May, although showing an improvement of almost 1% sequentially during last month. The trend is also supported by improvement in the consumer confidence index during June, according to the Universidad Torcuato DiTella. The index improved 11.2% sequentially during June and 12.8% year over year, although it is still at minimum levels so far during the Macri administration, compared with that of Argentina’s largest economic crisis in 2002. The confidence related to future expectations increased to early-2018 levels before the most recent financial crisis unfolded.

Below, a chart is shown reproducing two factors within DiTella’s index: confidence level related to current conditions (orange line) and future expectations (gray line):
 
The international context could also play a positive effect contributing to local stability. “The view is positive on Latin America and investors are being cautiously constructive on Argentina,” said Daniel Marx from Quantum Finanzas. The international financial markets are expecting the FED to lower interest rates between July 2019 and 2020 toward a 1.25 to 1.5% level, which could drive allocation to asset classes such as emerging markets. The trend seems to be supported by a more relaxed monetary policy in the European Union, Marx added.

Improved expectations on the key economic variables could positively affect Macri’s chances to secure a victory for a second term in office, as shown on the recent improvement on Macri’s net image, according to local polls. A downtrending inflation rate, more stable exchange-rate environment and improving confidence and activity levels could combine on a favorable economic and financial environment during the election period for the Cambiemos coalition. Despite such potential improvement, Macri’s acceptance levels remain at its lowest since he stepped into office in December 2015. The evolution of Macri’s net image ratings, monthly inflation rate and the leading index are reproduced below:
 
Recent Trends in Polls Ahead of Presidential Elections

Macri’s administration has been challenged by negative macroeconomic results. According to a poll from Opinaia, the government ranks the lowest in inflation and poverty reduction, employment and general economic management, while ranks best in public works, transparency and fighting corruption. Following the financial turmoil last year and its impact on the real economy, the positive impression of the government sunk to 30% as of May compared with 42% at the beginning of 2018, while the negative image jumped to 70% from 58% during the same period, according to the same survey.

According to Oh Panel, in terms of the candidates’ images, Macri ranks first out of the top five with the largest negative image at 56%, while Cristina Kirchner ranks fifth with 46% negative image. Meanwhile, Kirchner ranks fourth in the top five candidates with the larger positive image, 44%, while Fernández, the candidate running for president under the Kirchner ticket, ranks second with 47% positive image. Another poll from CIGP shows Macri and Kirchner both with a 50% negative image, while Kirchner leads on the positive image with 38% or about 9 percentage points above Macri. A chart reproducing the perception of each of the main candidates - positive (green), regular (orange) and negative (red) - is shown below:
 
Voter intention also showed polarization on the electoral front, with most of the vote divided between the official Cambiemos coalition and Frente de Todos, led by Fernández and Kirchner. The Kirchnerism ticker would lead with 43.6% vote intention for the next primary election in August, according to Gonzalez & Asociados, while the ticket led by Macri is running behind by more than 14 percentage points. A poll from CIGP also show the Kirchnerism movement taking the lead although by only three percentage points as of June, down from about five percentage points earlier this year in favor of Kirchner.

The same trend is shown in a poll from Opinaia, with a lead of about five percentage points for the Fernández-Kirchner ticket and 22% of voters undecided, while a poll from Opinaia shows a difference of about four percentage points in favor of the Kirchnerism movement.

On the one hand, in one of the latest surveys carried out by the Argentine polling consultancy CEOP, where 1,500 people were surveyed, shows that 42.8% of the electorate would vote for the Fernández-Kirchner ticket, enough to win the presidency in the first round of elections allowing them to avoid the second round. On the other hand, 24.6% of the electorate would vote for the Let’s Change coalition president in the first round, according to the survey. In another poll by Trespuntozero, a reputable polling company, indicates that 42% of the electorate would vote for theFernández-Kirchner ticket in comparison with 33.4% for the Macri-Pichetto ticket.

In order to win the presidency in the first round, the leading ticket needs to capture more than 45% of the votes or more than 40% with at least a 10-percentage-point lead in comparison with the second-placed presidential ticket. If no one wins in the first round, the first two tickets that win the most votes will go to a second round of elections where the winner needs to get over 50% of the total votes.

In the province of Buenos Aires, the largest province in Argentina, accounting for about 40% of the population, the electoral vote divides mainly between the Cambiemos coalition led by province’s governor Maria Eugenia Vidal and former ministry of economy Axel Kicillof, under the Frente de Todos ticket. In terms of image, both candidates rank at the top of the political landscape with highest positive image and among the lowest negative image. Vidal leads with a 48% positive image and 43% negative image, according to Oh Panel, while Kicillof has a lower positive and negative image, 45% and 40%, respectively. As of June, Kicillof was leading the vote intention with about 40%, compared with 35.9% for Cambiemos’ candidate and governor Vidal, according to Gonzalez & Asociados. About 10% in the survey were undecided.

The trend among the main polls are showing a tightening of the difference on vote intention led by the Kirchnerism in the last month. Earlier last year, the official party Cambiemos continued leading the polls after the midterm election in 2017 and until June 2018, right after the beginning of the financial crisis that eroded about 50% of the local peso and left the country with a $57 billion stand-by agreement with the IMF to honor debt repayment. From there, and although no formal candidates were disclosed, the vote intention turned to other alternatives from the official coalition Cambiemos such as the Kirchnerism and Alternativa Federal. Below, the evolution of vote intention, according to a recent poll:
 
2019 Presidential Electoral Calendar
 

• Aug. 11: Primary election;
• Sept. 7: Begins campaigning period for general elections;
• Oct. 27: General election;
• Nov. 11: Second round, or ballotage.