Argentina’s Elections: Toward an Economically Chaotic Runoff

O n Sunday night, Argentines voted in a presidential election that resulted in a runoff, which will take place November 19 between current economy minister Sergio Massa (37 percent) and lawmaker Javier Milei (30 percent). While markets were pricing in the fact that there was going to be no outright winner in this round, Massa’s win came unexpectedly, as almost everyone predicted that Milei (a conservative libertarian) would maintain the small lead he had secured in the August primaries.

Overall, it looks like the fear campaign against Milei, as well as the multiple handouts and high-profile tax cuts that the Peronist government announced in recent weeks, worked in Massa’s favor, despite the ongoing recession, the 140 percent annual inflation rate, and the recent run on the peso. Massa wisely ran a campaign that largely avoided economic themes.

On Monday, the initial reaction to Massa’s win was one of fear as markets priced in a potential November win by him. The day after the election, the peso fell by 20 percent in the informal “blue-dollar” market, and Argentine ADRs declined up to 10 percent, although Tuesday saw some gains for bonds. Massa has attempted to calm markets by claiming that there will be a fiscal surplus next year, and further announced the creation of yet a new kind of exchange rate (aside from the blue-dollar trading, which is a black market, the rate of the peso is fixed by the government), which is set to be more favorable for exporters.

Massa’s measures surely are already fueling the inflation that was already accelerating. In September, consumer prices rose by 12.7 percent, the highest rate in three decades. With international debt markets virtually closed to the government, spending more and pocketing less means that, contrary to Massa’s claims, Argentina is likely to miss the IMF’s deficit target this year — regardless of who wins the runoff. And with Massa still determined to prevail, everyone expects him to further increase public spending in the coming month.

On the other hand, Milei’s hopes depend on a worsening economy, which means he will try to exploit any available vulnerabilities. This is likely why he has insisted on his proposal that Argentina should dollarize, even if the Central Bank has no dollars. At this point, a run against the peso is positive for him in the context of the campaign, even at the risk of hyperinflation. But more generally, Milei’s own fear campaign is just simply a matter of reciting the policies of the current administration, which have run Argentina into the ground.

The outcome of the runoff remains uncertain, which is expected to make markets volatile in coming weeks. In this context, a definitive Massa win in November is not likely to ease investors’ fears, whereas the probability and the effects of a Milei resurgence are unclear. If Milei is to beat Massa, he needs to convert the 23 percent who voted for Patricia Bullrich, the moderate candidate and a former minister of security in the last center-right government. Bullrich endorsed Milei this Wednesday and former President Mauricio Macri followed suit early Friday. which could make the race competitive — although it should be noted that some in the political alliance that supported Bullrich have objected. But even if Milei has a chance at winning, the fate of his proposed economic policies (particularly his proposed dollarization of the economy) is uncertain, since he would not command a majority in Congress and his party would not be represented at all among governors and mayors across the country.

Perhaps surprisingly, there is still some consensus that Argentina’s economy will fare better in 2024 than in 2023, which may be tempering negative expectations about the election. The passing of this year’s drought will mean increased soybean production (Argentina is one of the largest soybean exporters in the world), while oil and gas exports will benefit from the recent completion of the first stage in the gas-pipeline project between the giant Vaca Muerta field and Buenos Aires. These changes, along with the higher demand for lithium (of which Argentina has large reserves) from the growing electric vehicle sector, ought to boost Argentina’s dollar reserves — but perhaps not by enough to counter the seemingly permanent runs against the peso. Thus, while whoever becomes president will inherit a dangerous economic situation, a rebound next year may provide a respite. But the questions remain: Who will it be? And will he make constructive use of any improvement next year? 

Note

Updated to reflect the endorsement of Milei by former President Macri.