Political Risk Alert (30 Oct. 2019)

Argentina: Election outcome means early start on debt challenge Event: Alberto Fernandez achieved a comfortable first-round victory over incumbent President Mauricio Macri on October 27. Significance: Avoiding the need for a second round should help to speed up efforts to tackle the economic crisis and bring forward the start of debt renegotiations with creditors. Fernandez’s economic transition team is closer to him than to his vice-president-elect, former President Cristina Fernandez de Kirchner (CFK). However, the extent to which the populist-leaning CFK will dominate the new administration is a major concern for investors, as is the outlook for talks with the IMF. Meanwhile, the political alliance that backed Macri’s pro-business stance looks close to disintegrating. Analysis: Fernandez won a clear margin of 48% to 40%, although this was smaller than suggested by recent polling. However, the fact that Macri improved his performance by some 8 percentage points is due to the votes he won from smaller parties' candidates, increasing polarisation between his allies and those of Fernandez. Generally regarded as far more moderate than CFK, Fernandez will find himself limited in his policy choices by both economic constraints and demands of more radical Kirchnerist groups such as the youth movement La Campora. Given his own lack of an independent support base, those groups will not hesitate to emphasise that his election victory was due to Kirchnerist backing. This shift in post-election emphasis towards CFK has already begun. After first ceding the presidential candidacy and then maintaining a low profile during the campaign in a bid to downplay the controversies that surround her, CFK was very much centre stage on election night, and the Frente de Todos celebrations were dominated by images of CFK and her late husband, former President Nestor Kirchner. Moreover, her former Economy Minister Axel Kicillof won a convincing victory in the election for Argentina's largest governorship, Buenos Aires province, giving an even more radical figure a key position in the new political landscape. From the time his candidacy was announced, there have been suspicions that Fernandez was intended to be a stalking horse for CFK and that her supporters might even try to force him to step down immediately after the election and hand her the presidency. However, even if some close to CFK may have hoped for this, Fernandez is a political survivor whose record makes his agreement to this unlikely. At the same time, there have been suggestions that CFK only returned to elected office in order to avoid the range of corruption charges filed against her. This, too, is implausible. CFK has a belief in her political mission and the need to vindicate herself and her husband, and is not simply looking to avoid a trial. By the same token, she is unlikely to settle for being a secondary figure, which sets up serious tensions at the top of the new administration. Yet Fernandez has some advantages in any struggle for power, not least being his hold on the presidency. He is a skilled political operator and is far more likely than CFK or Kicillof to gain a measure of consensus with provincial governors and in Congress. As vice-president, CFK will preside over the Senate, in which she still enjoys a strong nucleus of support. However, her divisiveness outside that base is among her weak points and Fernandez's political skills are likely to prove crucial for the new administration in dealing with the legislature. The Frente de Todos, in alliance with Peronist sectors outside the Kirchnerist bloc, will have its own majority in the Senate, with 39 of 72 seats. However, for legislation requiring a two-thirds majority, it will be forced to negotiate with Macri’s Cambiemos, the second-largest bloc with 28 seats. In the Lower House, Cambiemos is the largest bloc, with 119 of 257 seats, implying that the Frente de Todos/Peronist alliance, with 108, will have no choice but to negotiate support. Macri's Cambiemos alliance performed well in some central provinces; Macri won the presidential vote in key jurisdictions such as Cordoba, Mendoza and Santa Fe, as well as the city of Buenos Aires. However, his defeat as an incumbent has undermined any hope of a future leadership role, at least in the near term, and important elements of the coalition such as the Radical Party may distance themselves. The 14-point defeat of Buenos Aires Governor Maria Eugenia Vidal, also from Macri's own PRO party and widely believed to be more popular than he, deprives the coalition of another leader hitherto seen as a future presidential hopeful. Vidal's early suggestions that she will retire to private life for the time being also raise questions over whether her political fortunes can be revived. The one Cambiemos figure who remains a potential future opposition leader is the mayor of Buenos Aires, Horacio Rodriguez Larreta, re-elected by a margin of 20 percentage points over a close ally of president-elect Fernandez. The most immediate priorities, even before Fernandez takes office on December 10, will be to begin talks with the IMF and hammer out a starting point for debt renegotiation discussions with other creditors, as well as to outline and begin implementing social policies aimed at reducing extreme social distress. The fact that Fernandez represents a change of leader and has promised to prioritise the social crisis will win him a degree of patience from the public that would have been denied to Macri. However, he has little margin for manoeuvre in a context of continuing recession, high inflation and urgent debt concerns. Although his role in the country’s economic turnaround under Kirchner in 2003 was heavily stressed during the election, he is unlikely to be to engineer a similar recovery as current domestic and international conditions are far more challenging. Looking ahead: Fernandez will face greater policy pressures from within his own Frente de Todos alliance than from the defeated Cambiemos coalition, although his government will also have to negotiate with Cambiemos to push legislation through Congress. His ability to set his own agenda may depend on how effectively he can reach and maintain alliances with the Peronist governors. Both coalitions will face realignments and may fracture.

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