Argentina: A Mountain of Reforms Will Face One Peronist

After last year's devastating 10.9% drop in real gross domestic product, Argentina is rebounding from its worst-ever crisis faster than expected. The peso's devaluation has led to a 16% surge in exports, a manufacturing boom, and 5.8% economic growth in February.

But like a spotlight, the Apr. 27 presidential elections brought Argentina's underlying problems back into view. Former President Carlos Menem topped a crowded field with 24% of the vote. But his slim 2% edge over fellow Peronist Néstor Kirchner failed to reassure investors that Argentina is ready to tackle the reforms needed to sustain the recovery. Kirchner, backed by President Eduardo Duhalde, is an untested governor of a small province whose thinking is more interventionist. The two will square off in a May 18 election. Pro-business candidate Ricardo López Murphy, a U.S.-trained economist, finished out of the running. The day after the election, investors dumped stocks, and the Merval index plunged 8.6%.

Neither candidate will discuss detailed solutions to Argentina's top problems: rebuilding the balance sheets of insolvent banks and renegotiating $95 billion in defaulted bonds. Also, foreign owners of privatized utilities, whose rates have barely budged, even as the peso has plunged 70%, are crying for help. Addressing these issues is crucial to rolling over the country's $31 billion tab with the International Monetary Fund when an existing credit line expires on Aug. 31. Then policymakers must craft the budget cuts and tax and labor reforms needed to generate the investment required for future growth.

Much depends on how the next President navigates the fragmented political landscape. The divided Peronists and politicians of other stripes will be in campaign mode until the November congressional elections. Plus, Argentines are not eager to continue the policies they blame for 17.8% unemployment and a 58% poverty rate in their once largely middle-class country.

By Joshua Goodman in Buenos Aires

    Before it's here, it's on the Bloomberg Terminal.