August 15, 2019

Argentina’s primary election: unexpected results, but what’s next for investors?

This week's surprising primary election results in Argentina sparked a sharp sell-off in both the country’s stock market and its currency, which at one point was down roughly 30% versus the U.S. dollar. Our emerging-markets debt team takes a closer look at the economic and political stakes in the months ahead.

Presidential primaries are a relatively new phenomenon in Argentina—they were introduced in 2009 to reduce the number of candidates in the general presidential election; voting in the primaries is compulsory and open to all voters regardless of party affiliation.

As recently as last weekend, the results favored the opposition coalition of Alberto Fernandez, who had about 48% of the votes, with the sitting President Mauricio Macri’s coalition gathering only 32%. The opposition coalition includes the presidential candidate himself, long-time political fixture Alberto Fernandez, and vice presidential candidate Cristina Fernandez de Kirchner, who was president herself from 2007 to 2015.

The general presidential election is scheduled for October 27 and outright victory requires at least 45% of votes or for a candidate to garner 40% of the vote and hold a 10-point lead over second place. If necessary, the top two candidates will face a second-round vote scheduled for November 24. The last day of the current administration is December 10.

How Fernandez took the markets by surprise—and why it matters

The results in the primaries represent the most negative tail-risk scenario and reflect investors’ fears that, under a Fernandez administration, the country would go back to the populist policies of the 15 years prior to President Macri’s election in 2015, particularly those espoused by Cristina Fernandez de Kirchner.

The surprise factor in the primary results so far has been Fernandez’s margin of victory. Essentially all of the major polls forecast Fernandez finishing with a small 2- to 4-point lead, forcing a second-round vote, which the incumbent Macri was predicted as likely to win. None of the pollsters forecasted a margin as wide as today’s 15 points.

This week’s election represents an awkward not-yet transition period: Despite Fernandez gathering the largest vote totals in the primaries, he is still just a candidate, and the current administration under Macri has another 10 weeks before the general election. No transition period can begin until a winner is declared either in the first- or second-round vote.

What happens next: no guarantees of a Fernandez victory or dramatic policy changes

As of this writing, the market consensus is that there is little likelihood that the Macri coalition goes on to reverse the primary vote, given the two big challenges facing the current administration. On one hand, the administration needs to concentrate efforts on stabilizing the macroeconomic situation while maintaining its positive course regarding fiscal and monetary policies per the directives of the International Monetary Fund (IMF). On the other hand, Macri faces the uphill battle of reinvigorating his campaign and reinforcing his message to overcome the wide vote deficit experienced in the primaries.

While the base case is that the Fernandez coalition will win, it’s not a foregone conclusion what policies will follow or that his administration will seek to reverse policies implemented under Macri. Fernandez is often described as a pragmatist, so markets should expect his administration to offer a combination of both mainstream and unorthodox policies—for example, on issues like social benefits.

And there are reasons to believe preserving some of the current administration’s momentum would be well advised: Given the early signs of economic recovery in Argentina and the recent decline in inflation into the third quarter, the prospect of policy continuity had led to strong performance in both hard-currency sovereign bonds (up roughly 9%) and Argentina’s local stock market (the MERVAL Index was up about 43%)—all the way up until last Friday, August 9.¹

The market reaction, of course, has been swift and severe, and reflects pricing in the prospect of radical changes to current policy direction. We believe it is in the best interest of all political factions to maintain a constructive relationship with the IMF and to manage the country’s debt load with a market-friendly framework. We would expect signals of moderation from the Fernandez camp, but it's still premature given where we are in the election cycle. As always, we are monitoring the situation closely and will reassess the market implications once more information becomes available.

1 Hard-currency Argentine debt is a component of the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Index, a market-capitalization-weighted index that tracks the performance of U.S. dollar-denominated Brady bonds, Eurobonds, and traded loans issued by sovereign and quasisovereign entities. The MERVAL Index (mercado de valores) is a price-weighted index of securities traded on the Buenos Aires Stock Exchange. Stocks are selected based on their market share, number of transactions, and quotation price. It is not possible to invest directly in an index. Performance quoted is from 1/1/19–8/9/19. Past performance does not guarantee future results.

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