By Valerie Hernandez, International Banker
On October 22, Argentinians will head to the polls to cast their votes in the first-round general election and determine the country’s next president. With current President Alberto (Ángel) Fernández not seeking re-election, a new face will be in charge of the economically beleaguered South American nation. But with the ruling coalition government’s candidate, Sergio (Tomás)Massa, trailing significantly behind the two current favourites, the implications of the election results could be profound for Argentina’s economic prospects.
According to a poll conducted in August by market research firm CEOP Latam, which asked voters what their biggest concerns were, a resounding 82.2 percent of respondents cited the choice “the economy and inflation” as the major concern for this election. This easily outstripped other options, such as “insecurity” at 38.1 percent, “justice” at 19.1 percent and “corruption” at 18.5 percent. Indeed, with August seeing Argentina’s annual inflation rate hit a whopping 124 percent and monthly prices rise by 12.4 percent from July’s levels—respectively, the highest annual and monthly inflation rates since 1991, when Argentina was recovering from severe hyperinflation—such concerns are not surprising. And with a central bank poll published on September 13 showing that annual inflation is expected to reach 169.3 percent by the end of this year, the situation will likely deteriorate further before improving.
It is no wonder that poverty in Argentina has skyrocketed this year, as an excruciating cost-of-living crisis has made many essential goods unaffordable for households across the country. On September 27, the government’s INDEC (National Institute of Statistics and Censuses) statistics agency confirmed that Argentina’s poverty rate hit 40.1 percent during the first half of the year, up from 39.2 percent in the second half of 2022 and 36.5 percent in the prior six months of 2022.
Some economists even believe that hyperinflation similar to that of those dark days of the early 1990s could return, particularly with the current government having promised to introduce a raft of spending measures just before the September 27 deadline, after which vote-seeking behaviour was banned. After Massa placed third in the Simultaneous and Mandatory Open Primaries (PASO) held on August 13 to determine the final runners for the impending presidential and legislative elections, the ruling Peronist coalition has attempted to boost its electoral chances by announcing that it will give two separate payments in October and November to the country’s informal workers—representing around half of Argentina’s total labour force—totalling 94,000 pesos (approximately US$270). Additional handouts will be administered to registered workers and retirees, with an estimated 2.7 million people receiving cheques from the government.
The payouts will be financed by an extraordinary tax on banks and other big companies that were deemed to have benefitted most from the devaluation of the peso in mid-August—a condition imposed by the International Monetary Fund (IMF) as part of its $44-billion financing programme for the country, with $7.5 billion disbursed in August. “We have made the decision to charge an extraordinary income tax to those sectors that were the biggest winners of the devaluation imposed by the International Monetary Fund,” Massa said. The devaluation was implemented after the shock PASO election results, with the central bank raising its benchmark interest rate from 97 percent to 118 percent to weaken the currency to 350 Argentine pesos per dollar, where it will remain fixed until at least the first round of the election.
According to Argentine economics consultancy EcoGo, the government printed around 2 trillion pesos ($5.7 billion) to fund new spending before the election. “We can still avoid hyperinflation, but we are taking every step to get there,” Sebastián Menescaldi, associate director of EcoGo, told the Financial Times. “We are putting new pesos into the economy when there is no reason to do so.”
Amidst this punishing economic environment, ordinary Argentinians will be hoping for a dramatic turnaround in fortunes when they vote on October 22. But should no candidate win this first round outright by gaining at least 45 percent of the vote, or 40 percent with a clear 10-point lead, a run-off vote will occur on November 19.
Currently leading the polls is Javier (Gerardo) Milei, the right-wing libertarian candidate from the Liberty Advances coalition. Milei shocked the country when he received 30 percent of the vote in the primary elections—the most for any coalition or candidate—and claimed victory in 16 of the country’s 24 provinces. He is followed by the pro-business conservative and former security minister, Patricia Bullrich, of the centre-right coalition Together for Change, which won 28.3 percent. Massa, the nation’s current economy minister and member of the ruling centre-left Peronist Union for the Homeland coalition, meanwhile, earned 27.3 percent of the votes. Myriam Bregman of the Workers’ Left Front-Unity (FIT-U) and Juan Schiaretti of the We Do for Our Country coalition round out the field as two outsider candidates.
A brash and confrontational character, Milei has seemingly earned the favourite tag by positioning himself as something of a government outsider in the mould of former US President Donald J. Trump and former Brazilian President Jair (Messias) Bolsonaro—that is, a right-wing populist who intends to shake up the system and the economy. He has already garnered headlines for his notorious outbursts, including labelling fellow countryman Pope Francis (Jorge Mario Bergoglio of Buenos Aires) a “disgusting leftist” and vowing to take a “chainsaw” to public spending, privatise public education, charge citizens to use the public healthcare system and do away with the health, education and environment ministries. “We have managed to build a competitive alternative that will put an end to the parasitic, thieving, useless political caste,” Milei declared in his PASO election victory speech.
Perhaps most notable from a macroeconomic perspective, however, is Milei’s plan to ditch the peso altogether, shut down the central bank and adopt the greenback as Argentina’s national currency. “The argument for dollarization is that there is no price stability and the independence of the central bank is an illusion,” Juan Nápoli, a Senate candidate for Milei’s Liberty Advances party, told Reuters in early September, adding that a 9-to-24-month timeframe has been outlined for the economy to achieve full dollarisation under a Milei presidency. “It requires a great political agreement between us and also having sufficient reserves”, which are deeply in negative territory at present. “It will take a while; it won’t happen immediately.”
Whether such rhetoric has any substance behind it and will be fulfilled by action if he is elected remains to be seen. But as of now, Milei’s dollarisation plan is polarising within Argentina. Some believe it is the solution to combat soaring inflation, while others decry the lack of economic sovereignty that would accompany it, having to sacrifice much of Argentina’s monetary-policy independence in the process. An October 6 Reuters survey of 125 local business executives, for example, found that only two supported full dollarisation of Argentina’s economy, while around two-thirds of respondents backed a bi-monetary peso-dollar system as advocated by fellow candidate Bullrich, and almost one-third wanted to stick with the peso as the sole currency.
“To me, it is an absolute last resort,” Olivier Jean Blanchard, a former IMF chief economist, explained to Reuters. “It’s very costly to give up [the] flexibility of the exchange rate.” Mark Sobel, a former U.S. Department of the Treasury official and current chairman of the Official Monetary and Financial Institutions Forum (OMFIF) think tank, added that dollarisation would deprive authorities of their ability to act as the lender of last resort, which would “heighten the vulnerability of the financial system”. Instead, he suggested the central bank stop printing money to fund the treasury and cut its fiscal deficit. And a former IMF director for the Western Hemisphere, Claudio Loser, said full dollarisation would be a “terrible shock” to the economy as peso holders would exchange them at very high rates, diluting savings.
But this hasn’t deterred citizens from seeking dollars in recent weeks. Indeed, some are already preparing for a full-dollarisation scenario by snapping up as much of the US currency as they can get their hands on in the run-up to the election. With central bank reserves depleted and thus rendering the peso effectively undefendable, Argentinians are now dollarising their salaries more fervently than at any time this year by flocking to parallel exchange markets in which the US currency recently traded for as much as 900 pesos. “Consensus is gaining in the market that the complex dollarization plan of the candidate who leads the polls could be exacerbating the typical pre-election dollarization of portfolios,” according to a note by local brokerage Portfolio Personal Inversiones (PPI).