Argentina’s Reform Elections?

The next president is likely to take a more market-friendly, pragmatic approach to the country’s economic challenges, says Eurasia Group’s Daniel Kerner.

October 22, 2015

Interview
To help readers better understand the nuances of foreign policy, CFR staff writers and Consulting Editor Bernard Gwertzman conduct in-depth interviews with a wide range of international experts, as well as newsmakers.

Argentines vote in presidential elections on Sunday, and for the first time in twelve years, the name Kirchner will not appear on the ballot. Peronist President Cristina Fernandez de Kirchner, who came to power in 2008, following the term of her late husband, Nestor, is leaving behind a faltering economy and a standoff with international creditors. Eurasia Group’s Daniel Kerner expects Argentine politics to enter a less divisive, more inclusive governing period focused on economic reforms. Top candidates are Buenos Aires Governor Daniel Scioli, a Kirchner ally; Buenos Aires Mayor Mauricio Macri; and Tigre Mayor Sergio Massa. “There’s going to be a more rational and reasonable and market-friendly approach to a lot of the problems,” says Kerner.

Presidential candidate Daniel Scioli and President Cristina Fernandez de Kirchner during a rally in Buenos Aires, October 20, 2015. (Marcos Brindicci/Reuters)) Presidential candidate Daniel Scioli and President Cristina Fernandez de Kirchner during a rally in Buenos Aires, October 20, 2015. (Marcos Brindicci/Reuters)

Argentina’s next president will inherit a stagnant economy and double-digit inflation. How do the candidates differ in their approaches to these challenges?

My take is that there’s not a big difference. Regardless of who wins or what happens, things will change quite a bit. If you look at what happened in Argentina over the past twelve years, everything has been really dictated by what the two Kirchners wanted—first Nestor, then Cristina—and their way of understanding the world, their way of understanding policy. They governed in a way which was also very peculiar, with a very strong degree of concentration of decision-making power. Every single decision was really made by the presidents; ministers and secretaries didn’t play a major role. Also, both Kirchners had a very political view on economic issues; they often interpreted economic developments as politically motivated actions. For them, inflation was not a function of the fiscal and monetary policies, but companies trying to take advantage of the government, for example. Usually the response to economic problems was to increase state intervention rather than make policy adjustments.

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Elections and Voting

Heads of State and Government

"Regardless of who wins or what happens, things will change quite a bit."

That’s going to change, because regardless of who wins, you’re going to have someone who’s much more pragmatic, much more reasonable, [and who] is going to govern in a much more collegial way with advisors and policy brokers. There’s going to be a more rational and reasonable and market-friendly approach to a lot of the problems that Argentina has today.

On the economic front, there is a general consensus about what the problems are. The numbers are not credible and statistics have been manipulated, but the general consensus among private analysts is that inflation is probably above 25 percent, the fiscal deficit is probably higher than 5 percent of GDP, and reserves are around $27 billion, but with very strict import and capital controls [Editor’s note: In 2011, reserves were approximately $46 billion]. With capital controls, companies and individuals can’t buy dollars without government authorization, which creates a parallel exchange rate and it makes it very difficult for companies to plan ahead for imports, which has a negative impact on productivity. The general perception is that the economy really hasn’t grown in the past four years.

People agree that the next government needs to lift foreign-exchange and import controls, stabilize reserves, do fiscal adjustment to reduce the deficit, and regain access to external markets. Everyone more or less agrees on the way to do it, which is, first of all, trying to make the adjustments cause as little pain as possible, meaning not to do a major devaluation, and trying to do a relatively gradual adjustment overall.

The next president will have to consolidate his power after twelve years of the Kirchners. They’ll all more or less try to be as gradual as possible, but in the end, the economy will force them to move very quickly. What that means is some degree of devaluation could happen, which [would] essentially mean an increase in energy prices, a rapid move to try to settle with all the creditors to regain market access, and not much beyond that.

More on:

Argentina

Elections and Voting

Heads of State and Government

What’s at stake in the standoff with international creditors? How do the candidates say the will resolve the issue?

Argentina defaulted in late 2001 and restructured significant parts of it debts in 2004–2005 and again in 2010, very aggressively, with a large haircut. Seventy-six percent of creditors accepted and in 2010 it increased to 93 percent, and those [creditors] had been getting paid. The holdout creditors did not accept that restructuring, and they have been battling against Argentina in the courts for years. [In 2012, a U.S. federal judge] ruled that if Argentina wants to pay the rest of the bondholders they have to pay the holdouts as well, which requires Argentina to pay everyone or not pay anyone. Without paying, access to international markets becomes more difficult, which is something they need to increase reserves and improve economic policy.

The candidates all want to solve this issue as quickly as possible as they feel that’s the only way to regain market access and issue new debt. The issue there is the [political] capacity. The next president will need to reform at least two laws in Congress to make a payment and reach a settlement. If Scioli wins—which I think will happen—he’ll have enough support to do it. That may mean breaking with the current president, but I think he’ll have enough support. All three candidates just want to settle [the standoff] very quickly to regain market access. If Macri, the opposition candidate, wins, he’ll have much more difficulty getting [the necessary reforms] through Congress than Scioli would.

The front-runner, Scioli, is a political ally of the president’s. Do you think even he would represent a change from the status quo?

Yes, a substantial one. He was Nestor Kirchner’s vice-presidential candidate in 2003 [to] appeal to middle-class and independent voters, and he always saw this alliance [with the Kirchners] as his way of making it to the presidency.

"The general perception is that the economy really hasn’t grown in the past four years."

In spite of the enormous amount of power that the Kirchners had and the fact that she still has a high degree of popularity they were never really able to create a successor. So [Kirchner] ended up accepting [Scioli] as a successor, knowing perfectly well that he has a very different agenda and a very different view, and that’s true of the rest of the party. In the end I think most of the other power brokers in the party will support a different agenda [from the Kirchners’].

How does Scioli differ from Kirchner on the issues?

First of all, he has a much more pragmatic and rational approach to policy, and he likes to listen to his advisors. Second, the Kirchners always think that whatever happens in the economy or foreign policy is [part of] a conspiracy against them, and Scioli doesn’t necessarily see it that way. He has a much more positive view of the private sector and is more willing to work with them. In foreign policy, I don’t think he believes that the U.S. is a problem. He’ll be more pragmatic about that. More specifically, I sense that he believes he [would need] to settle with hold-out creditors and pay them more or less what they want, that he needs to lower inflation, and that he needs to have more market-friendly policies in general. 

Has the controversy surrounding the death of the prosecutor Alberto Nisman earlier this year been an issue in the elections?

Not at all. The president’s popularity declined originally, but then recovered after a month. [It’s] interesting how serious allegations of corruption, investigations, and even [Nisman’s] death have not affected the president’s popularity. Her approval ratings are in the mid-fifties and are unaffected by anything other than the economy. 

Is the next president likely to improve relations with the United States? Is that a priority?

Foreign policy in general is not a priority, but I think they will. It’s not a coincidence that last year the three current candidates visited Washington and New York, which is something that Latin American politicians don’t do anymore. I think the next president will take a less ideological stance and have more of an affinity with the United States. There’s going to be a strong incentive to do so out of economic necessity, to see if that helps with negotiations with the holdouts and getting money from multilaterals. 

What other foreign policy issues are priorities?

The key here is really the economy. The economy hasn’t grown in four years, reserves are low, and foreign-direct investment has been very low. The priority for the next government will be to stabilize the economy and generate growth, and that’s going to drive absolutely everything, [including] foreign policy. That means establishing ties with the U.S. and other countries, and trying to have more normal relations with other countries to improve trade and attract investment.

How would you describe the Kirchners’ legacy?

They’ll leave with enormous popularity. The Kirchners were in power when the commodity supercycle occurred. The economy and exports grew. They mismanaged the economy but also expanded social policy and thus will leave very popular. But maybe the main legacy is that [their rule] has further discredited market-friendly policies among voters and has left very high demands and expectations in terms of growth and fiscal resources that future governments will struggle to fulfill. And I think that’s going to be a potential source of problems in further years. 

This interview has been condensed and edited.

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