In Argentina, If Macri Wins 2019, The IMF Wins Too
“If Macri wins, he will continue with the IMF for much longer than many think,” says Jan Dehn, head of research for the Ashmore Group in London, a $70 billion asset manager. Dehn doesn’t think that’s a bad thing. It enables Argentina to roll over their debts, rather than be pressured by the IMF to do so under a new government, especially if that new government is not Macri or Cambiemos party member and Buenos Aires governor Maria Eugenia Vidal. Vidal is also a favorite should Macri lose popular support throughout the year.
Investors have two concerns when it comes to Argentina: Macri faces a challenging election later this year because the economy is in recession, and public services are being trimmed. The biggest fear is that Cristina Kirchner runs and makes it to the second round.
Kirchner’s quasi-socialist economic policies are largely to blame for the current economic weakness. And now most Argentinians have grown dependent on the government thanks to those policies. So when Macri comes in and takes them away, or charges more for them in order to keep the lights on, people are easily persuaded to believe that life was cheaper and better under Kirchner.
Macri’s approval rating has held steady over the last four to five months. He leads Kirchner. So does Vida. Kirchner is under pressure due to the ongoing Notebooks scandal in Buenos Aires. Many centrist Peronist parties are not willing to support her, feeling she will not win a second round runoff against Macri in November.
A Peronist government is not necessarily a headwind. A Kirchner government, however, is a cyclone and would likely mean another default. If Kirchner was elected, the IMF program would be at risk. Her election would be a total repudiation of the IMF once again, which then calls into question the whole IMF system: If it’s so good, why does everybody hate it?
Any unforeseen domestic shocks, like a new coalition between moderate Peronists and Kirchner, or adverse weather conditions that hurt the all-important agriculture sector, will weaken Macri’s chance of winning.
Everyone will be watching the peso for direction. If the peso inches back into the 40s, Macri’s future looks dim. It is currently trading at 37.94, down from 37.63 on Wednesday.
The peso has been holding steady since August after collapsing from 19 pesos to the dollar in January 2018 to 41 pesos to the dollar in mid-October.
The 2019 budget relies disproportionately on dollar-denominated financing with a cash cushion of $6.4 billion and $27.1 billion of dollar-denominated loans. There have been no formal details on this released by the IMF yet, but markets assume there will be market-based auctions of dollars as opposed to direct transfers to the central bank.
This represents a form of indirect currency intervention at a convenient moment if the election-related jitters in the economy trigger a peso sell-off, says Siobhan Morden, fixed income director for Nomura in New York. “These loans would represent the primary source of dollar inflows to counter any capital flight or dollarization of peso holdings,” she says about keeping the peso stable.
There is still a sizable stock of pesos in shorter-term deposits as well as the uncertainty on the rollover rate for Argentina's short-term T-bills, known by the acronym LETES. This poses the important challenge to peso stability in the second half of the year when the campaign heats up.
On the political front, the latest headlines show the potential threat of an opposition candidate besides Kirchner. Former Finance Minister Roberto Lavagna is viewed as the most viable opposition candidate among the moderate Peronists.
He has higher national visibility and higher popularity versus other moderate Peronists. It still remains an uphill battle for any of these candidates to reach critical mass near 30% and get enough voters to unify behind a single candidate for what still remains a competitive contest.
President Macri’s approval rating hasn’t cracked 40% in a long time. A unified moderate Peronist poses the most important threat to Cambiemos, which may not be entirely awful for Lagarde and the IMF unless they run on an anti-IMF platform. For Lagarde and Macri, the best chance—and the most dramatic one—is Macri versus Kirchner. The peso will definitely hit the 40s in October if those two appear to be the match-up for who will lead Argentina in 2020.