Argentina's Promising Election
After a dozen years of mercurial populist rule by President Cristina Fernandez de Kirchner and her late husband, Nestor, Argentina's economy is up the River Plate without a paddle. And judging from the tight results in this weekend's presidential election, the country's voters aren't sure what to do about it.
The closeness of the result has forced an unprecedented runoff on Nov. 22. The remaining contenders have promised a new economic direction and less confrontational politics. Here's hoping they mean it: Argentina needs both.
The economy is in trouble. A pre-election surge of government spending has kept gross domestic product growing this year, but at the cost of a rising fiscal deficit expected to hit 6 percent of GDP. There are more government jobs, but industrial production is stagnant and the rate of private sector employment is lower than in 2006. The central bank's reserves of $27.7 billion aren't enough to cover the country's financing needs next year, which one analyst puts as high as $45 billion.
It doesn't help that Argentina defaulted last year for the eighth time and remains shut out of international capital markets. Foreign exchange and import controls have widened the gap between the official and black market values of the peso to as wide as 70 percent, leaving the country at risk of a massive devaluation.
The main candidates in Sunday's vote all made similar promises -- from negotiating with Argentina's holdout creditors to declaring a tax amnesty to lure back foreign savings. And financial markets took comfort in the strong second-place performance of challenger Mauricio Macri, the mayor of Buenos Aires. He's seen as more likely to move quickly in making changes than the first-place finisher Daniel Scioli, the ruling party candidate and governor of Buenos Aires province.
But whoever wins next month will have to forge some kind of consensus on moving ahead. The balance of power in Argentina's two legislative houses will make that necessary. Smart sequencing of policy will be crucial -- and consensus would help in that regard as well.
Subsidies on energy and transportation -- which now eat up almost 5 percent of GDP -- need to be cut back. But ending those programs too abruptly would be a brutal shock to Argentina's poor, and politically disruptive. Ending currency controls too suddenly would also be dangerous -- perhaps causing the peso to plunge and inflation to soar. What's needed is a gradual and sustained effort, and that won't happen without a measure of agreement.
A good first step would be to shield Argentina's statistics agency from the political meddling that drew censure from the International Monetary Fund and called into question official figures on inflation and GDP. A tax amnesty could repatriate billions of dollars in savings stashed abroad. Cutting the tariffs that have turned Argentina's productive farmers into world-class hoarders could help replenish central-bank reserves.
Those things might be achievable. The problem is, the election's final round may be a sharper, nastier contest. Scioli could be tempted to rally his party's base by drawing on the demagogic skills of his sponsor Fernandez. It's the last thing the country needs.
No amount of railing about "vulture funds" will end Argentina's shortage of dollars or restore its broken links to the world economy. The next government will have to embrace reform and come to terms with aggrieved bondholders. Over the next month, the candidates shouldn't make those tasks any harder than they are already.
--Editors: James Gibney, Clive Crook.
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