Tue | Dec 12, 2017

Walter Molano | Argentina: A clear mandate

Published:Friday | November 3, 2017 | 12:00 AM
In this Auugst 13 photo, President of Argentina Mauricio Macri casts his vote during the open primary legislative elections in Buenos Aires.

The midterm elections delivered a resounding victory to President Mauricio Macri, and his Cambiemos coalition. He swept the four largest cities in the country - Buenos Aires, Cordoba, Santa Fe and Mendoza.

His candidate, Esteban Bullrich, even beat former President Cristina Kirchner de Fernandez by four points in the senate race for the Province of Buenos Aires. Under Argentine electoral rules, the winner gets two seats, while the runner up gets one.

This meant that Mrs Kirchner de Fernandez will move on to the senate, where she will enjoy some judicial immunity. However, the message that was delivered by the congress a few days after the elections meant that she was not beyond the long arm of the law.

This occurred when the Lower House voted in favour of stripping Congressman Julio De Vido of his legal immunity. De Vido was accused of a long list of corruption and abuse charges during his tenure as Kirchner's planning minister. The next day, as the police were showing up at his home, he turned himself in; thus putting another Kirchner ally behind bars.

President Macri's candidates won the gubernatorial race in 13 of the country's 23 provinces. Even the charismatic Peronist candidate, MaÒuel Urtubey, lost his governorship in the Province of Salta. Urtubey was one of the leading Peronist contenders for the next presidential election, but now he may slip into oblivion.

The midterm elections left the Peronist party in tatters, with some Argentine commentators saying that it was time to rethink the party. The ideals and imagery of Juan Peron are outdated, and it is time for it to modernise.

Anger for Kirchner

There is a great deal of anger within the party at Cristina Kirchner and her polarising tactics. The most vivid example was the case of Santiago Maldonado, a hippy activist who disappeared during a violent protest in the Province of Chubut. Maldonado had joined a group of Mapuche Indians who were protesting against the seizure of their indigenous burial grounds. Molotov cocktails were thrown, and the police gave pursuit. Maldonado was never seen again. Cristina Kirchner de Fernandez used the incident to incite her followers, saying that it confirmed that the Macri administration was an incarnation of the military dictatorship, where young protesters were "disappeared" and the government maintained cosy relationships with large corporations.

Yet, the move backfired. Many Argentines resented her use of the painful memories of the dictatorship to further her political ambitions. To make matters even worse, four days before the elections, the police found Maldonado's body only 300 metres from where he was last seen. His brother identified him from his tattoos, and no signs of aggression were found on his body. All signs pointed to the probability that he had drowned while crossing the icy Chubut River as he fled from the police.

This helps explain how Fernandez de Kirchner's movement lost in traditional Peronist bastions - such as the Province of Buenos Aires. Despite dealing with a poverty rate of 33 per cent and inflation rate in the mid-20s, Argentines were no longer interested in going back to the populism and rampant corruption of the previous administration.

The electoral victory is not only a strong mandate for change, it suggests that Macri will be around for another six years. This is a sufficiently long period of stability for foreign direct investors to take a new look at Argentina.

URGENT REFORMS

Macri does not have an outright majority in the Senate or the Lower House, but he now controls the biggest minority. This should give him the votes needed to press ahead with his legislative agenda. Top on the list will be fiscal reform, followed by the implementation of the fiscal responsibility law.

These reforms are urgent. Argentina needs to plug its 4.5 per cent of GDP fiscal deficit. Although the government was able to raise utility rates, they are still very low. As a result, subsidies are costing the government almost two per cent of GDP. Likewise, the massive issuance of debt has now raised financing costs to two per cent of GDP.

Next up will be labour reform. Although Argentina will not embark on an as extensive programme as the recent Brazilian labour reform, the new measures will help liberalise the work regime. The federal and provincial governments have been able to deal with the fiscal and current imbalances by issuing debt in the international and domestic markets. But, this has created some problems.

The government has become too dependent on international investors to meet its obligations, and they are a fickle crowd. The high level of liquidity could evaporate if external conditions change. Likewise, the massive issuance in the domestic markets has crowded out the private sector, and this could affect the level of economic activity.

Nevertheless, implementing the reforms will help alleviate the problem. Fortunately, the electorate gave the government the green light to move ahead.

Last of all, the government continued to push ahead with the much-needed pension reform. The legislation is moving at a glacial speed, but the Lower House is expected to vote on it by next month.

The improvements on the economic and policy front were somewhat met by the situation on the political front. On the positive side, the PT appears to be dead. Former President Inacio Lula da Silva was found guilty for accepting R$3.7 million in bribes from OAS Engineering, and was sentenced to 10 years in prison.

Nevertheless, a recent poll found that 35 per cent of the respondents indicated that they would vote for him in the 2018 presidential elections. This has raised some consternation in political circles, but his rejection rate of 46 per cent to 60 per cent, depending on the pollster, makes it unlikely that he could win.

The more serious threat comes from the far right, in the form of Congressman Jair Bolsonaro. Hailing from the State of Rio de Janeiro, he is a former military paratrooper. He is known for his homophobic stance and misogynist comments. Hoping to emulate the success of Donald Trump, he is capturing the overall contempt for the mainstream political parties.

After veering far to the left, Brazil's political pendulum may be swinging in the opposite direction. Some investors may take this as a positive development.

However, we must recall that the right's record of economic management in Brazil was disastrous. Nevertheless, the developments on the economic and policy front, as well as the demise of the political left, are reasons to be extremely optimistic about Brazil.

It is as if rays of light were finally shooting out from behind the dark clouds that have obscured the Brazilian horizon for years.

- Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com