On 27 October last, the centre-left Peronist Alberto Fernández won the Argentine presidential election with 48% of the votes against incumbent president Mario Macri, for a four-year mandate that will begin on 10 December. The outcome of the elections also means the return to power of former president (2007-2015) Cristina Fernández de Kirchner as the new vice president. According to the analyst, the economy was the main factor why Mauricio Macri lost the election and it will also be the most difficult issue on the new government's agenda. The new president will first of all have to face negotiations with private bondholders and with the International Monetary Fund to identify a path to external debt sustainability: pleasing both voters and bondholders will be very difficult, if not impossible, and the real question is who will bear the most costs. At the same time, Macri's centre-right Juntos por el Cambio (JC) coalition remains an important counterweight, since the JC coalition will be the largest in the Chamber of Deputies. Hence, the new administration will have to cooperate with the JC group to define its political program and there are preliminary signs that Macri and Fernández are willing to do so.
Among the president-elect's top priorities are stabilizing the economy and rebuilding business and investor confidence. The economy has been contracting since last year (-3% in 2019 and more than -1% forecast for 2020), inflation persists at an annual rate close to 55%, unemployment is above 10% and the poverty has increased to more than a third of the population. The public finances could suggest an important improvement, because in the last two years the primary deficit of the public budget has been almost eliminated (0,5% of GDP), however the payment of interest expense on the public debt and the total deficit have increased of the public budget still remained at 4% of GDP. The public debt-to-GDP ratio, which was 2015% at the end of 52,6, will rise to 93,3% at the end of this year (IMF data, World Economic Outlook).
In the first two years of Macri's government, the country had attracted huge financial capital and the government had managed to sell well even 100-year bonds; however, the majority of securities placed were in foreign currency and with a maturity of less than 10 years. In the spring of 2018, a phase of sharp depreciation of the national currency began due to the large capital outflows from the country, since investors had begun to lose confidence in the executive. Concerned about possible financing difficulties on international markets, in May 2018 the government asked the IMF for help, which granted a 36-month Stand-By Arrangement (SBA) for around 57 billion US dollars, of which 44 have already been disbursed. During 2018-19 the public debt in foreign currency increased further: according to official data of the Ministerio de Hacienda in mid-2019, the public debt of the central administration was 337 billion, of which the part denominated in foreign currencies amounted to 259 billion (76,8% of the total) and that regulated by foreign legislation was 137 billion (40,8% of the total).
In the coming years, Argentina would therefore find itself paying large sums to service its debt, resources that could be spent in other sectors, such as the social and productive ones: in 2020 alone, the expected expenditure on interest and principal repayments in foreign currencies will be around 16 billion, not counting the arrears from 2019. Confidence plummeted after Macri's unexpected defeat in August's primary elections, reflecting fears by local businessmen and investors that a Peronist return to power would mean a repeat of interventionist, protectionist and uneconomic policies, and subsequent sovereign defaults. The result of this crisis of confidence was a sharp depreciation of the peso (by about 25% against the dollar) and a decrease in official reserves (by about 20%), forcing the government to impose partial exchange restrictions starting from 2 September. Those restrictions were even tightened on Election Day, reducing the maximum amount of dollars Argentines could buy from $10 a month to $200, in order to avoid further declines in the peso and official reserves.
The new president Alberto Fernández has declared that he does not intend to ask the IMF for the part of the SBA not yet received, and that he will aim to stimulate exports, an important channel for increasing foreign exchange reserves. At this stage, it is unrealistic to expect the new government to embark on a policy of austerity in order to run a primary budget surplus: the severe economic adjustment it would require would be too costly for Argentines and, as demonstrated by the popular uprisings in Chile and Ecuador, Latin American civil societies are less and less inclined to tolerate painful adjustments. There are therefore no conditions to avoid a restructuring of the external debt: in the absence of an agreement, the restrictions on the foreign exchange market imposed to protect currency reserves and limit the depreciation of the exchange rate will almost certainly remain in force. Despite the controls, official reserves fell by 20%, while the peso hit a new record low (almost breaking the 60 peso mark per USD) just before election day. So far, further tightening appears to have worked to stabilize the currency, as the peso has appreciated modestly since election day. That said, the coin weakened in the black market to 77 per dollar, fueling investor concerns about the extent of the restrictions.
Even in the most optimistic scenario, the first months of Alberto Fernández's presidency will be extremely difficult. Argentina finds itself crushed by a high external debt, which has grown further following the sharp depreciation of the peso since mid-August, and precarious social conditions. The main challenge for the new government is to find compatibility between the economic sustainability of the public debt and the social sustainability of the recovery process. The margin of disappointment among Argentine investors and voters is high: if the new executive does not regain investor confidence, a new sovereign default could follow, making it even more difficult to attract the financing needed to revive the economy. However, breaking electoral pledges to end austerity could lead to widespread social upheaval, which could potentially make investors even more reluctant to invest in the country. The longer the period of uncertainty about the direction of economic policy, the greater the risk of a real default. In any case, tackling Argentina's deeply rooted economic problems will be difficult and will take many years before an adequate solution is reached.
