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Emerging Markets

Roll of the dice

The Kirchners shocked the nation by bringing forward the Argentine mid-term elections. But as the economic picture darkens, whether the controversial move can stave off defeat remains an open question.

President Cristina Fernandez de Kirchner’s announcement on March 12 that mid-term elections will be brought forward to June 28 from October 25 scattered the poker chips across political tables throughout Argentina.

Whatever doubts the surprise decision raises – including whether or not it will pass vote-by-vote congressional contest, especially in the Senate – it confirms that Cristina’s husband and de facto presidential partner, Nestor Kirchner, has no fear of throwing the dice.

While the four-month advance in the election date should disabuse everyone of any notion that the Kirchners are willing to play by the institutional rules of the game, the audacity and cynicism of the move is, according to many observers, nevertheless astonishing.

The manoeuvre was triggered mainly by the Kirchners’ deteriorating political capital, though justified on the grounds that the world international economic crisis would take its toll on Argentina. Cristina Fernandez’s public approval ratings have plummeted to around 25% from over 50% when she was elected in October 2007; negative evaluations of the government are over 40%. An earlier vote would better

position the first family to avoid a humiliating defeat, which could have unpredictable repercussions. This is all the more acute following defeat in Catamarca during a provincial election thought by the Kirchners to be a shoo-in.

The possibility of a crushing defeat would be more dramatic if Kirchner becomes the “K” Peronist’s candidate for provincial deputy, as is widely assumed. He is reported by independent pollsters to have around 30% to 35% of the vote in the industrial belt of the province, enough to scrape by but with no guarantee of a decisive victory.

Fund management

Ironically, hopes for more responsible policy-making were beginning to emerge recently. Although the Kirchners continue to reject any overture towards the IMF, suggestions had been made that Argentina could approach the Fund for assistance once the institution’s governance structure is overhauled to represent industrializing middle-income economies more accurately.

But the prospect of meaningful governance reform at the Fund remains remote – and the Kirchners are unlikely any time soon to reverse their long-espoused position on the Washington lender. Yet there is nevertheless a growing awareness that the IMF is the only possible source of fresh money for the sovereign, after years of financial isolation following the $95 billion default in 2001 and debt swap. The country needs breathing room as the economy slows, and its debt payments total some $18 billion this year alone.

Analysts had been taking some comfort from reports of meetings between representatives of bond holders who did not join the 2005 debt swap. Similarly, repeated assurances by government officials that they will soon settle $6.7 billion of defaulted debt owed to Paris Club creditors had encouraged observers. A successful swap in February of guaranteed loans totalling $960 million – nearly 100% in the local market and around 50% in the international market – also helped dispel concerns over Argentina’s ability to meet its 2009 debt obligations.

But the Kirchners’ recent casino-political moves have raised fresh questions about the government’s intentions. There is growing doubt over whether rapprochement with global markets is either feasible or desirable. According to economist Mario Brodersohn, attempts to overcome any one of the financial market barriers “would be all political cost without any benefit whatsoever”.

A quick review of Argentina’s stance on international debt sheds light on the country’s dilemmas. While reform of public policies – in particular an overhaul of scandal-tainted national statistics bureau Indec – might have helped pave the way towards an agreement with the Paris Club, the result would merely have been a $7 billion roll-over, including a painful recognition of past due interest. Roll-overs are also likely in the case of bilateral debt issues, a fact that would help loosen credits for specific public-sector projects – but only once a Paris Club deal is reached.

Dangers

Yet no matter the gravity of the international financial issues in question, they do not factor prominently on the Kirchner’s economic or political agenda. This is dangerous – especially as a more prolonged and sharper economic contraction is now on the cards for Argentina. Morgan Stanley forecasts an economic contraction of 4.7% of GDP for 2009.

The scope for meaningful policy slippage – including nationalization of the pension fund industry or rising protectionism – has increased, according to Morgan Stanley. A prolonged period of global economic weakness could translate into a more enduring downturn locally, partly because authorities cannot rapidly devalue the currency because of fears regarding the local banking system.

The decline in the terms of trade due to falling commodity prices is a key variable impacting Argentina’s external balances. Commodities represent 65% of total exports. Moreover, exports of food and agricultural products plus other raw materials represent the most significant source of federal tax revenues. As the year-long battle between the agro sectors and the government continues without any signs of a satisfactory truce, producers are continuing to postpone shipments and withhold dollars. In addition, the worst drought in over half a century will reduce this year’s crop by approximately 20%, with a profound impact on revenues.

Declines in other sectors are just as alarming: 55.7% in the auto industry, white goods are down over 30% despite government stimulus attempts, and steel lost 32% in the last year. Unemployment has yet to feel the full impact of the deceleration but is closing in on 10%, while unofficial poverty rates are near 13%.

Brodersohn notes that the economic news is certain to worsen as the year progresses. So a rush to the voting booths, however institutionally questionable and politically perilous, is, under the circumstances, the only ace the Kirchners have up their sleeves.

“If they win, he’ll be able to go in any direction he wants,” says economist Miguel Kiguel, “but the problem with that is that no one has any idea what he wants.”

If credibility is one of their objectives, forcing a new election date may be one wild card too many.

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