ASSESSMENTS
Previewing Argentina's Presidential Primary
By offering a glimpse into the makeup of the country's next government, the outcome of Argentina's upcoming primary elections could spook markets, spur nationwide demonstrations and potentially even trigger a run on local banks. Argentina will hold primary elections on Aug. 13 to choose the candidates who will run in the country's October presidential and legislative elections. When it comes to the presidential race, polling indicates there are four main contenders: leftist Economy Minister Sergio Massa, conservative Buenos Aires Mayor Horacio Rodriguez Larreta, conservative former Security Minister Patricia Bullrich, and libertarian lawmaker Javier Milei.
- Massa represents the ruling populist Union por la Patria (UP) coalition. A career politician, he became Economy Minister in August 2022 with the main promise of reducing Argentina's inflation and avoiding a worsening of the country's economic crisis. Despite these promises, inflation in the country has continued to rise during his tenure. UP has another presidential contender who will participate in the Aug. 13 primary, but Massa is expected to win the coalition's nomination by a broad margin.
- Larreta and Bullrich will be competing to become the presidential candidate for the conservative Juntos por el Cambio (JxC) coalition, which opinion polls suggest will be a tight race. Both candidates have promised to cut public spending, make labor laws more flexible, and reduce taxes and regulations. But they have different views on how quickly these pro-business reforms should be implemented. If elected president, Bullrich has pledged to push through a spate of reforms in the first hundred days of her tenure, while Larreta has advocated for a more gradual approach that seeks to gain consensus from opposition parties.
- Milei, who was only elected to the lower house of Argentina's Congress in 2021, is a wildcard candidate with little political experience. He has attracted voters who are disenchanted with the mainstream political parties by proposing radical ideas like shuttering the country's central bank, replacing the Argentine peso with the U.S. dollar, drastically cutting public spending, and denouncing the ''political caste.''
Voting in primary elections is mandatory in Argentina, which means next month's ballot will serve as a strong indicator of the outcome of the presidential election in October. Since 2009, Argentina has made it mandatory for all citizens of voting age (18-70 years old) to participate in primary elections. This sets it apart from other countries like the United States where voting in primaries is optional, resulting in lower turnout compared with general elections. Argentina's ''open, simultaneous and obligatory primaries'' (commonly known by their Spanish acronym PASO) have, in turn, become a strong indicator of overarching electoral trends in the South American country, which have historically been confirmed in the subsequent general elections. In both 2011 and 2019, for example, the candidate who obtained the most votes in the presidential primary went on to win the presidency. And in 2015, the candidate who secured the most votes in the primary won the first round of the presidential election, though lost in the second round. This means that if a candidate secures significantly more votes than anyone else in next month's primary, there's a fair chance they'll go on to replicate their victory in the October presidential election. However, if the primary elections show a narrow margin between two or more candidates, the results of the presidential election will remain open.
This election cycle comes as Argentina is battling a growing economic crisis fueled by record inflation, ineffective governance and high debt levels. Argentina's inflation is expected to reach 145% by the end of 2023, one of the highest inflation rates in the world. Amid very tight capital controls, Argentina's central bank sells millions of dollars every day in an effort to prevent a steep devaluation of the country's local currency. The peso's unofficial exchange rate is nearly double the official exchange rate, serving as a consistent drain on Argentina's foreign currency reserves. With insufficient foreign financing and negative central bank reserves, the government risks being forced to implement a large one-time devaluation of the peso. Buenos Aires is also struggling to make interest and principal payments to reduce its massive debt burden, which reached 83% of GDP at the end of 2022 (or $394.1 billion). While the government's program with the International Monetary Fund helps cover some of Argentina's foreign currency obligations, a large domestic currency debt and generous welfare payments for low-income households still force the Argentine government to print millions of pesos every month, which then exacerbates the country's sky-high inflation.
- According to the IMF, Argentina's economy will expand by a mere 0.2% in 2023, while neighboring Brazil and Uruguay will grow by 0.9% and 2%, respectively.
Markets would likely respond negatively if Massa, the favored ruling party candidate, performs surprisingly well in the presidential primary, as it would raise the prospect of another leftist administration. But since Massa is seen as more centrist than Argentina's current president, such an outcome would unlikely result in significant economic turmoil. Most polls don't have the ruling UP coalition winning the presidency in October. But should Massa, the coalition's frontrunner candidate, perform better than expected in the primary next month, it could stoke panic among investors and Argentine savers who fear another leftist UP president would see a continuation of the heavily interventionist economic policies that have come to define leftist President Alberto Fernandez's time in office. This could see bond rates rise and the peso's unofficial and official exchange rates slide shortly after the primary results are announced. But while he hails from the same coalition, Massa is seen as a more centrist and less polarizing political figure compared with the country's outgoing president. Many members of Argentina's political and economic establishment also perceive Massa as a more skilled political operator than Fernandez. This means that some local businessmen and investors could still view a potential Massa presidency as an improvement from the Fernandez administration, as evidenced by sovereign bonds rising roughly 4% after Massa announced his candidacy. If Massa performs well in the primary, Argentina would thus likely see its tumultuous economic climate continue but not worsen in the months leading up to the October runoff election. A strong Massa performance would also be unlikely to result in significant unrest, as many of the Argentine unions and activists support the country's current leftist government and would thus welcome the prospect of another UP president.
Conversely, markets would likely respond positively if the conservative JxC candidates perform strongly in the August primary, though Argentina could see disruptive protests among left-wing activists and labor unions. Both Larreta and Bullrich have promised to reduce taxes and regulations in Argentina's economy, as well as cut public spending as a way to reduce inflation. They have also both promised to make the country's labor laws more flexible to make it easier and cheaper for companies to hire workers. As many of these measures are considered pro-business, a strong performance by either JxC candidate in the primary would likely help to temporarily stabilize the peso (or at least slow its devaluation). But the country's broader investment attractiveness would still be unlikely to improve in the short and medium term due to underlying poor economic conditions. If the combination of primary votes for Larreta and Bullrich suggests that JxC could win the presidential election, Argentina's unions, activist groups and pro-UP sectors would probably call for strikes and stage demonstrations as well, for fear that a JxC administration would introduce pro-business labor reforms and scale back the scope and scale of welfare benefits. A strong showing for Bullrich could even provoke a mass protest movement, as she is seen as the more conservative ''law and order'' candidate between the two who would be more likely to crack down on social unrest and push her policy agenda through without first seeking consensus from opposition parties in Congress and other civil society sectors.
- A strong performance of either JxC candidate would likely also prompt the outgoing Fernandez administration to quickly enact measures aimed at undermining its potential conservative successor. This could include hiring public sector workers en masse in the hopes of forcing the next administration to conduct widely unpopular layoffs akin to those imposed by former President Mauricio Macri, who triggered nationwide demonstrations in 2016 after laying off 20% of the country's public workforce.
Should Milei perform strongly in the primary, his radical agenda could result in a run on Argentine banks by creating a general panic in households and the financial sector. A self-proclaimed libertarian, Milei is running on a promise to completely dismantle Argentina's current economic model by abolishing the central bank and replacing of the peso with the U.S. dollar. Should Milei see a stronger-than-expected performance in next month's presidential primary, it would likely stir anxiety among investors, citizens and businesses alike by suggesting he stands a serious chance of winning the presidency in October. The massive uncertainty about what a Milei presidency would look like and what it'd mean for the economy would almost certainly see investors press pause on starting new projects in Argentina, which could be detrimental to the growth in the country's crucial mining and hydrocarbon industries, along with its budding start-up culture. By raising the specter of dollarization, a surprisingly strong showing for Milei in the primary may also lead to a run on Argentine banks, as households and companies scramble to swap their pesos for U.S. dollars before they're potentially forced to do so when the exchange rate is less favorable. Such a mass panic could, in turn, force the outgoing government to impose even stricter capital controls (including a prolonged bank holiday to prevent savers from withdrawing their money), as well as implement a large one-time devaluation of the peso before the general election.
- If Milei wins the presidency in October and follows through on his campaign pledge, Argentina would be the largest economy in the world to dollarize. Milei has promised that Argentinians would be able to exchange their pesos for dollars at a rate similar to what they currently get on the black market (a key source of U.S. dollars for millions of Argentinians). However, economists from other political parties have warned Milei's proposed dollarization would take place at a more unfavorable exchange rate due to the central bank's poor dollar reserves, which would severely cut into Argentinians' wages and savings and drastically reduce their purchasing power.
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