Argentine Peso Crashes As Leftist Populist Candidate Takes the Lead in Primary Election Results

Macri Vows to Win Second Term
August 13, 2019 Updated: August 13, 2019

BUENOS AIRES—The Argentine peso currency crashed following news that populist left-wing Peronist opposition leader Alberto Fernández was leading in the primary election.

Market fears over Argentina’s potential return to the interventionist economics of the previous leftist government prompted stocks and bonds to tumble, and Argentines rushing to buy U.S. dollars. In response, President Mauricio Macri vowed on Aug. 12 that he would win a second term.

Argentine President Mauricio Macri
Argentina’s incumbent President and presidential candidate Mauricio Macri is seen on stage during the primary elections, at a convention centre in Buenos Aires, Argentina, on Aug. 11, 2019. (Luisa Gonzalez/Reuters)

Alberto Fernández is running with former President Cristina Fernandez de Kirchner, who was indicted on corruption charges last year and is currently standing trial.

Under the Kirchner governments of Cristina and her late husband before her, the IMF reported that public spending went from 23 percent of GDP to 41.3 percent. The collapse of Argentina’s economy in 2012 saw Macri win the 2015 elections as one of the few non-Peronist leaders in the country’s history. But he was left with the challenge of reviving a bankrupt country.

ormer president Cristina Fernandez de Kirchner
Former president Cristina Fernandez de Kirchner leaves a building after a meeting with presidential candidate Alberto Fernandez, in Buenos Aires, Argentina, on Aug. 12, 2019. (Luisa Gonzalez/Reuters)

Macri said he would “reverse” the result of Sunday’s primary, but acknowledged that the weakened peso would fuel inflation.

The peso closed 15 percent weaker at 53.5 per U.S. dollar after plunging some 30 percent to a record low earlier in the day.

Refinitiv data showed Argentine stocks, bonds and the peso had not recorded this kind of simultaneous fall since the South American country’s 2001 economic crisis and debt default.

“I trust we will have a more even election in October that will allow us to go to a second round. Those who don’t want to go back to the past will join us,” Macri said at a news conference, adding that he was not considering a cabinet reshuffle.

Fernández, a former cabinet chief, dominated the primary vote by a much wider-than-expected 15.5 percentage point margin over the president.

Fernández has said he would seek to “rework” Argentina’s $57-billion standby agreement with the International Monetary Fund if he won October’s general election. An IMF spokeswoman declined to comment on the Argentine primary result, citing a policy of not commenting on political developments.

Argentine stocks were among the top losers on the Nasdaq index, and the local Merval stock index closed 31 percent weaker. Falls of between 18-20 cents in Argentina’s benchmark 10-year bonds and century bond left them trading at around 60 cents on the dollar or even lower.

Morgan Stanley downgraded its recommendation for Argentina’s sovereign credit and equities from “neutral” to “underweight” and said calculations suggest the peso could fall another 20 percent.

“Given the narrow path ahead, our view is that a high degree of policy continuity is a must in order to maintain macro stability,” Morgan Stanley said in a research note. It predicted “further downside pressure and volatility” in bond prices.

Argentina’s central bank intervened, selling $105 million in the foreign exchange market to defend the peso in the face of the massive sell-off. The auction used the bank’s own reserves for the first time since September of last year, traders said.

Macri and Liberalization

Macri, a scion of one of Argentina’s wealthiest families, came to power in 2015 on promises to kick-start Latin America’s third-largest economy via a liberalization wave.

Argentina currently remains in a recession with inflation at over 55 percent.

An acute financial crisis last year hit the peso after which Macri took an IMF loan in return for pledging to balance Argentina’s deficit.

Sunday’s result indicated that Fernández had enough support to clinch the presidency in October’s first round, without having to go to a November run-off election.

A candidate needs at least 45 percent of the vote, or 40 percent and a difference of 10 percentage points over the second-place runner, in order to win the presidency outright.

Argentina’s main political parties had already chosen their presidential nominees, allowing the primary to serve as a first concrete measure of voter sentiment.

Supporters of Alberto Fernandez
Supporters of presidential candidate Alberto Fernández react after the primary elections, at a cultural centre in Buenos Aires, Argentina, on Aug. 12, 2019. (Agustin Marcarian/Reuters)

The peso weakening was dramatic but Win Thin, global head of currency strategy at Brown Brothers Harriman in New York, said he does not expect an emerging markets-wide contagion beyond perhaps Brazil and Uruguay given that the peso is not heavily traded.

Edward Glossop, Latin America economist for Capital Economics, predicted even higher inflation in a country that has fought against chronic rising prices for decades.

It is “completely feasible” for the peso to drop to as low as 70 per U.S. dollar, Glossop said.

Voters were given a stark choice to stay the course of painful austerity measures under Macri or return to economic policies that are heavy on state involvement.

Kirchner imposed strict currency controls that slammed investment during her 2007-2015 administration. She fought with the farm sector over export taxes and presided over a multi-year standoff with bondholders that kept Argentina locked out of the international capital markets.

“I would say they (bonds) are pricing in a much higher probability of a default,” said Aberdeen Standard EM portfolio manager Viktor Szabo.

Szabo did add however that they were still above the 40 cents level that would truly reflect a fully fledged default.

Fernández prevailed on Sunday in the majority of the country’s provinces, but one of the starker differences was seen in the poor suburbs of Buenos Aires.

What particularly dented Macri’s support were newly impoverished Argentines who were more energized to vote to punish him at the polls, political analysts said.

Analysts predicted Sunday’s results could be the final nail in the coffin for Macri.

“Macri has already implemented a number of short term measures to try and shore up support ahead of the October vote. Additional promises can be made, but the gap he needs to make up is a very wide one,” said Ilya Gofshteyn, senior emerging markets strategist at Standard Chartered Bank.

Right-wing Brazilian President Jair Bolsonaro warned that his country could see a wave of migrants fleeing Argentina if Fernández wins the presidential election.

Bolsonaro has strongly rebuked the policies of left-wing leaders around Latin America and celebrated his friendship with Macri.

By Cassandra Garrison and Hugh Bronstein. Epoch Times staff contributed to this report.

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