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the end Of the Kirchners?
The mid-term elections, to be held on June 28, are likely to be a defining moment in Argentine
politics and could signal the beginning of the end for the current presidential couple. We see the
government losing ground to the opposition, which will cost the ruling Frente para la Victoria (FpV)
coalition its majority in congress. While this may raise short-term economic and political uncertainty,
over the medium term, a more balanced congress will help reduce the government’s ability to imple-
ment distortionary economic policies. A weakened government would also increase the prospect
that a non-Kirchner president will emerge at the helm in 2012. The threat of an imminent default
has been largely alleviated by the recent rise in commodity prices and attempts at restructuring
the country’s debt load. The current policy mix, however, will continue to undermine medium-term
economic stability and we still cannot discount a sovereign default over the coming years.
Latest polling data support our view that the ruling Frente para la Victoria (FpV) alliance will lose
crucial ground to the opposition in June’s mid-term elections. According to local newspaper Clarin,
six recently-taken polls give former president Néstor Kirchner, who is leading the FpV ticket in
Buenos Aires, a thin lead (between two and nine percentage points) over his nearest rival, Peronist
dissident Franciso de Narvaez, of the opposition Union Pro Party in the key battleground of Buenos
Aires province. However, this may not be enough for the government to maintain its majority in
congress, with the combined votes measured by the six polls giving the opposition between 20-21
of the 35 seats up for grabs in Buenos Aires. We believe that such a result would be a positive
outcome for both short-term political stability and the medium-term economic outlook. In our view,
comments made by former president Néstor Kirchner that the country would face a return to chaos
in the event an opposition victory are little more than electioneering.
Although Argentina’s economic activity index continues to show expansion, data on industrial
production, retail sales, construction output, and imports suggest that the economy is slipping
into recession. While Q109 real GDP data will give a clearer picture, we note that the risks to our
forecast of a 1.0% real GDP contraction this year appear weighted to the downside. We maintain
our view that the economy will contract by a further 0.9% in 2010. On the external front, we have
also upgraded our trade surplus forecast to reflect the reduction in imports and higher export prices,
yet still see a weakening exchange rate this year as the government attempts to cover its fiscal
surplus and protect the country’s export sector through inflationary means. While the government
will likely avoid a sovereign default this year, and has shown a renewed willingness to improve
its creditworthiness, fiscal profligacy will continue to leave the country exposed to fluctuations in
commodity prices and undermine the country’s long-term economic fundamentals.
The Argentine business environment outlook continues to be threatened by a number of factors. The
uncertain political landscape is a major deterrent to FDI, especially with the direction of economic policy
in the balance. The inflation issue remains a key risk, as the government’s official figures continue to
underreport the true rate of inflation, in our view, and the expansionary fiscal policies threaten to crowd
out private investment. Recent attempts by the Argentine authorities to improve its creditworthiness via
bond prepayments and acquiring Word Bank financing should alleviate fears of a near-term default.
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