Sunday’s election results marked the beginning of the end of the K era, while the final deadline is 2011, when the new government takes over. It is clear that the Kirchners lost the election, and that they have no chance of a comeback. The next president will almost certainly be more moderate politically and more market friendly. The front runners, which are Reutemann, Cobos, Binner and Macri among others represent a shift to the center and hence we should expect more sensible economic policies starting in 2012.
But the outlook for the next two years is unclear. The population has sent a strong message, though the President does not seem to have listened, and hence there are more certainties about 2012 than about next year. What are the issues to watch and the risks?
In the short run the main concern is the deterioration of the fiscal accounts, as the government has increased spending during the campaign. To make matters worse, the provinces also face fiscal pressures, and they are in a better position to negotiate with the central government than they were prior to the elections.
What are the options? The first and most obvious one is to cut government expenditures. The obvious candidates are reductions in subsidies and in public sector investment, and more stringent wage policies. Tax increases are out of the question. This year the financing will come entirely from existing resources (Banco Nacion, Central Bank and Anses), which should be enough to cover the financial gap.
Some analysts argue that a devaluation could help, though I am skeptical about the effectiveness of this option for two reasons. First, the pass-through effect to prices and wages could be large, given that inflation is already in the mid-teens and that the rate of unemployment is not as large as it was in the 2001-02 period. Second, while tax revenues could increase through export taxes, it would not help much during the second half of the year as the bulk of soybean exports take place during the first half. Besides, the government still has to buy dollars to service the debt, which means that devaluation could at best a partial solution. The Central Bank seems to share this view, so in the base case scenario, don’t expect maxi-devaluations.
In our view the solution to the fiscal problem will be gradual and will hinge on an increase of revenues over time from high inflation and the return to growth next year, plus the benefits from larger exports in 2010. Of course, it needs to be supported by a tough stance on expenditures which means “good bye populism”. It can be done, but it needs a good understanding of the situation.
What are other things to watch? First, whether there will be changes in the Indec, which at the moment seems unlikely; again, it seems that it is a change that will only happen by 2012, as it is doubtful that it could take place under the K administration. Another issue to monitor is the degree of government interference with the markets in general and with private companies in particular. Hopefully the government will retreat from recent advances, but it is an issue to monitor.
The good news is that there are now more checks and balances. The Peronist governors and political leaders who are thinking about the 2012 elections will impose limits on some policy decisions. These forces preclude some extreme policies akin to last October’s nationalization of the pension funds.
The initial reaction to the elections has been a market rally, though it was short lived thanks to Cristina’s press conference. The medium term outlook has certainly improved; the popular vote shows that Argentina will not go the Venezuela way, but there are still many unknowns about the transition.