Election Watch: Economy set to dominate as Argentinians prepare to go to the polls

In October and November 2019, millions of Argentinians will elect vote in the upcoming general election. The outcome will have significant implications for businesses with interests in the country, particularly in the oil and gas sector.

Argentinians prepare to go to the polls

On 27 October, millions of Argentinians will go to the polls to elect the country’s president, as well as numerous members of both houses of the federal legislature. In the likely event that no presidential candidate wins either 45 per cent of the vote, or 40 per cent with at least 10 per cent more votes than the runner-up, a runoff election will be held on 24 November. The outcome of the election has significant consequences for companies which trade in and with Argentina, particularly those with interests in the oil and gas sector.

The election campaign, which officially begins on 22 September, is likely to be a close contest between incumbent President Mauricio Macri’s (2015-) centre-right Juntos por el Cambio alliance, and the Peronist, centre-left Frente de Todos (Todos) coalition, spearheaded by Alberto Fernández, a former head of the cabinet of ministers. Beyond the frontrunners, other high-profile candidates will include Roberto Lavagna, candidate for the social democratic Consenso Federal 2030 alliance and a former minister of economy and production; José Luis Espert, from the liberal Frente Despertar coalition; and finally, Nicolás del Caño from the leftist Frente de Izquierda y delos Trabajadores.

 Todos has yet to release a detailed energy sector proposal, private firms are concerned over the impact an opposition victory would  have on contracts signed under the Macri government, and macroeconomic stability

Key issues

The issue at the forefront of the election campaign will be the domestic economic situation. Under President Macri, Argentina’s macroeconomic performance has been largely negative, leading in many cases to declining living standards. Since Macri assumed the presidency in 2015, Argentina’s economy has been in recession twice – in 2016 and 2018 – although growth briefly surged to 2.9 per cent in 2017. The economy is forecast to contract by 1.3 per cent in 2019. Inflation has steadily risen during Macri’s presidency (see graph below); in May, the annualised rate of inflation exceeded 55 per cent.

Furthermore, the exchange value of the peso against the US dollar has fallen more than three times, increasing the cost of imports and making overseas travel more expensive for those earning Argentine pesos. Despite this, the primary deficit has fallen, indicating that Argentina’s long-run public finances are on a positive trajectory, despite the short-term negative impact on growth and inflation. 

Frente de Todos

Presidential candidate: Alberto Fernández
Vice-presidental candidate: Cristina Fernández de Kirchner
The central focus of Todos’ platform is addressing the negative macroeconomic situation. In an effort to stimulate consumption, the alliance would seek to renegotiate the country’s stand-by arrangement (SBA) with the IMF, signed in June 2018. Extending payment deadlines and removing payment obligations, thereby freeing up tax revenue for alternative uses, are key priorities.

The leftist coalition, which as of late July holds a 3 per cent lead in first-round polling, would seek to encourage growth through lowering taxes on small businesses, and removing value-added tax from the inflation index’s basket of goods. Protective measures, including tariff barriers and government procurement programmes which favour local products, would be reinforced to support domestic industry, while a new labour ministry would focus on protecting existing jobs and facilitating unemployed individuals’ return to work, as well as promoting tripartite salary negotiations.

While Todos wants to boost consumption, employment, and economic growth, the financial markets will likely be sceptical of its macroeconomic policy, particularly with the country currently holding the highest public debt in Latin America; public debt currently stands at 77.4 per cent of GDP. In particular, any decision to renegotiate the SBA would increase the likelihood of longer-term financial instability, and would likely provoke a sell-off of the peso and some capital flight from the country. Although strengthened consumption would assist firms with interests in Argentina’s domestic market, the risk of further macroeconomic turbulence, particularly related to the depreciation of the peso and likely associated inflation, would disincentivise future investment.

A renegotiation of the IMF agreement, however, would prove popular with unions and social movements, and lead to fewer instances of industrial action and protests. Given the leftist ideological foundations of Todos, the energy sector would likely face increased regulation and state intervention, while state-owned oil company YPF would receive increased funding. Contracts signed with the previous administration, particularly those to develop the enormous Vaca Muerta shale oil and gas deposit in the western province of Neuquén, may face renegotiation, heightening investment risks. These developments, combined with likely macroeconomic instability, would significantly limit the operating environment and investment opportunities for private energy firms.

In seeking to convince potential voters, Todos will likely focus campaign effort on the legacy of the government of Cristina Fernández de Kirchner, a former president (2007-2015) and the coalition’s vice-presidential candidate. While Fernández de Kirchner’s supporters credit her with expanding the middle class and increasing workers’ rights, her critics highlight ongoing court cases as evidence of misdeeds, committed both by her and members of her administration. Her administration’s legacy, and how it is popularly understood, is therefore likely to be a matter of significant debate during the campaign.

A renegotiation of the IMF agreement  would prove popular with unions and social movements, and lead to fewer instances of industrial action and protests

In seeking to convince potential voters, Todos will likely focus campaign effort on the legacy of the government of Cristina Fernández de Kirchner, a former president (2007-2015) and the coalition’s vice-presidential candidate. While Fernández de Kirchner’s supporters credit her with expanding the middle class and increasing workers’ rights, her critics highlight ongoing court cases as evidence of misdeeds, committed both by her and members of her administration. Her administration’s legacy, and how it is popularly understood, is therefore likely to be a matter of significant debate during the campaign.

Juntos por el Cambio

Presidential candidate: Mauricio Macri
Vice-presidential candidate: Miguel Ángel Pichetto

President Macri’s Juntos por el Cambio alliance, which features Peronist senator Miguel Ángel Pichetto as the vice-presidential candidate, will centre its campaign on rebalancing the economy within the framework of the current IMF agreement. The candidates will contrast their coalition’s conservative outlook on fiscal matters with the expansionary policies proposed by Todos. In attempting to achieve a balanced budget, Juntos por el Cambio will look to build confidence in and strengthen the peso relative to the US dollar, and believes greater macroeconomic stability will incentivise foreign direct investment.

Moreover, once the three-year IMF programme comes to an end, the government would have increased tax resources to dedicate to public spending and a healthier fiscal position. Furthermore, the coalition seeks to introduce a labour reform to boost employment, which would likely make it easier for employers to hire and fire workers. Internationally, a Juntos por el Cambio administration would also seek to further improve relations with countries with which Argentina has previously had disputes, including the US and UK, while continuing to build pressure on the government of President Nicolás Maduro in Venezuela.

Under Juntos por el Cambio, private energy firms would likely benefit from government policy – particularly in relation to investment opportunities in the Vaca Muerta shale oil and gas deposit. On 5 July, Macri launched a tender process for the construction of a major oil pipeline to service Vaca Muerta. The construction of the pipeline, at a cost of approximately USD2 billion, would facilitate the export of oil and gas through the port at Rosario. While Macri’s energy policies largely favour private operators, the volatile peso and poor GDP figures have held back investment. Furthermore, international firms have a diminished appetite for investment as long as global commodity prices remain low; in July 2019, for example, the global price of crude oil per barrel was USD56, approximately USD10 below the global price at the same point in 2018.

Several global trends, however, including instability in the Gulf…

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