Key implications of government's primary election defeat
The moderate faction of the ruling Frente de Todos (FdT, better known as the Peronists), led by the president, Alberto Fernández, has been pitted against the leftist, populist faction of the party, led by his vice-president, Cristina Fernández de Kirchner. Although The Economist Intelligence Unit does not expect an institutional crisis that would lead to the president's departure, the political scene will remain volatile in the near term.
But the post-primary conflict will also have serious implications for policymaking and the economic outlook in the rest of the current administration, bearing in mind that, among the many disputes within government, there are deep differences around fiscal policy and relations with the IMF. In this article we take a look at the ongoing dispute in the FdT and at the key political and economic implications of the September primaries.
The FdT's dismal showing in the primaries quickly stoked infighting within the ruling coalition. Several cabinet ministers and high-ranking officials, all allies of Ms Fernández, offered up their resignations in a display of their disapproval with the government. The moves were widely perceived as a gambit by Ms Fernández to force a cabinet overhaul and shift both the power centre and the policy direction towards her faction of the party. These speculations were borne out on September 16th, when Ms Fernández unexpectedly published an open letter on her website, with her autopsy of the primary election results. In the letter, Ms Fernández chastised the policy of fiscal tightening in the midst of a pandemic and an incomplete economic recovery. She also doubled down on her call for a cabinet overhaul. Mr Fernández, who has not yet responded directly, is unlikely to capitulate completely to his-vice president, and is also unlikely to be forced out. But even assuming a political truce is eventually achieved, there will be significant implications for policymaking and the political scene, which we have highlighted below.
The ruling FdT has lost the political initiative
As we have noted already, it currently seems more likely than not that the Peronists will actually retain control of the Senate in the mid-terms in November. The opposition Juntos por el Cambio (JC) would have to improve on its primary performance to deny FdT its majority, and the government is about to roll out a slew of spending measures to bolster its support between now and November. (That said, the race will be close, and infighting between the two main FdT factions will not help the party's chances.) But the result will be damaging for the FdT almost regardless of the November outturn. In Argentina, a perceived loss in the midterms—even if this reflects a loss of just a few seats—is usually the precursor to governability problems, as fickle allies, including governors, independent legislators and even the media, abandon ship. This helps explain why the ruling party has reacted so explosively to a primary loss, and suggests a much more difficult policymaking environment for the president going forward. This will provide an important check on the FdT's
power, and could thus serve as a moderating force. But the president will also be under pressure from parts of his own party to veer left on policy, and this will be a source of persistent political tension.
There will be a high risk of political tensions leading to social unrest
While engaging in verbal warfare with the president, Ms Fernández has claimed she would not become an "opponent within the government", perhaps to allay concerns of an institutional crisis of the kind that had happened in 2000, when the resignation of the vice-president, Carlos Álvarez, left the Peronist government led by Fernando de la Rua (1999-2001) fatally weakened. But the president is unlikely to be reassured by such statements. There are three possibilities here: that Mr Fernández capitulates to his vice-president, fills the cabinet with her supporters, and gives her de facto control in order to retain his title; that Ms Fernández leaves government, sooner or later, taking her legislators with her and leaving Mr Fernández a lame duck; or that both sides reach a truce and continue to co-exist in an intact FdT, with latent (and sometimes obvious) conflict within the ruling party persisting. We think the latter scenario is the most likely to materialise. Although this implies that tensions will subside somewhat, even under this scenario, we expect there to be the potential for conflict to spill out into the streets, bearing in mind that Argentina has a strong tradition of public protest, and depending on who Argentina's powerful unions and other key actors decide to support. For now, despite his travails, Mr Fernández continues to enjoy the support of key Peronist stakeholders, including major labour unions, business leaders and high-profile mayors and governors. If this were to change, increased tensions would result.
An IMF deal could now fail to materialise
For the government, sealing a deal with the IMF just got a lot harder. As we have long stated, an IMF deal is necessary to place the country back on the path to macroeconomic stability, and to give Argentina any chance of attracting foreign capital back to the country. We have pencilled a deal into our forecasts for the first half of 2022, but have also highlighted the risk that the government will prove unwilling or unable to get support for a deal. In her recent letter, Ms Fernández made clear her view that more fiscal stimulus is needed (ignoring the fact that Argentina has more or less run out of road when it comes to financing spending). The president may not fully share this sentiment, but will need to announce a series of spending measures ahead of November's poll to shore up his support. We will be watching these announcements carefully in coming weeks to gauge whether the government abandons fiscal prudence altogether, or whether it can walk a policy tightrope by loosening purse strings—but only a little, and for not too long. Any signs that the government is straying too far from this path will provoke a market reaction and will heighten the risk of a new currency crisis and a return to recession