Uncertainty hangs over Argentina’s political and economic future

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An unexpected heavy government defeat in Sunday’s midterm primary elections could seem like good news for investors who want to see Argentina cut spending, cut inflation and reach an agreement with the IMF on restructuring $ 45 billion in debt.

But it’s too early to celebrate. The poor result of the left-wing Peronist party of President Alberto Fernández does not necessarily herald a better economic policy or an opposition victory in the presidential election of 2023. In the short term, it could cause a swerve towards more populist policies .

The Peronists won just 31 percent of the vote, with the investor-friendly Juntos (Ensemble) coalition winning 40 percent. If this result were repeated in the legislative elections in November – which is not certain – Fernández would lose his majority in the Senate and Juntos would become the largest single-party bloc in the lower house, although it is still a long way from an overall majority.

The reasons for the defeat are not difficult to find. Fernández inherited an economy in recession but failed to deliver on his promises to reduce poverty and improve living standards. Poverty has increased, while inflation and unemployment remain stubbornly high.

“The economy played a much bigger role in the primaries than the government expected,” said Juan Cruz Díaz, managing director of the Cefeidas group, a risk consultancy firm in Buenos Aires. “The government hoped that the advance in vaccinations would have a greater effect, but it was not.”

Voters also expressed their anger over the handling of the pandemic. Fernández imposed one of the longest lockdowns in the world, crippling the economy. But lax enforcement and the need for the poorest Argentines to come out for a living has led to declining compliance and skyrocketing Covid death rates.

Mariel Fornoni, director of consultancy firm Management & Fit, said six in 10 voters in her polls disagreed with the government’s handling of the pandemic, and seven in 10 with its economic management. “A lot of people were so angry that they didn’t want to respond at all,” she said.

The recent publication of photographs showing Fernández hosting an illegal birthday party at the presidential residence during the lockdown peak was one of the main reasons voters were angry. “A lot of people back then had to say goodbye to loved ones by video or shut down their businesses, so it really hit a nerve,” Fornoni said. Adding to a separate scandal over well-connected government figures skipping the queue for vaccines, this has heightened the perception of an administration looking after its own.

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Fernández has yet to say how the government will react to the defeat. Cristina Fernández de Kirchner, the vice president and the real power behind the throne, is likely to push for a cabinet reshuffle to strengthen the influence of her more radical faction. This is unlikely to help at the ballot box; regions controlled by Fernández de Kirchner’s allies fare as badly as those close to the president. But with Argentina still excluded from international debt markets and the struggling economy, space for further increases in public spending is limited.

The opposition has its own problems. Sunday’s vote was more of a protest than a resounding endorsement from Juntos, many remembered for mismanaging the economy in 2018-19. The shadow of the unpopular former president Mauricio Macri hangs over the coalition.

The uncertain outlook helps explain the moderate initial reaction to Sunday’s vote in financial markets. While the government may be forced to moderate its economic policy, there is room for unpleasant surprises. These could include spending madness funded by printing money, greater intervention in the economy, or cuts within the ruling Peronist bloc. Argentina has been known to disappoint investors and these elections are unlikely to be an exception.

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