FREE

Argentina's Peronists Are Running Out Of Options Following Mid-Term Defeat

The mid-term election on Sunday, November 14th delivered a resounding defeat for President Alberto Fernandez and the Peronists. The ruling coalition lost seats in the Lower House, lost its majority in the Senate, and lost to the opposition in its stronghold province of Buenos Aires. As a result, President Fernandez will need support from the opposition to pass legislation during the last two years of his term. Moreover, the outcome highlights the President’s weak political position as he tries to build congressional support for an agreement with the IMF, a deal that could lead to a split with his own Vice President, Cristina Fernandez de Kirchner. The big question now is what direction policy will take in the coming months.

Key highlights include:

• The current policy mix in Argentina has led to large economic imbalances, and sustaining them over time does not look feasible.
• The ability to reach an deal with the IMF will be key in determining whether the pending adjustment will be orderly or disorderly. With an agreement, efforts to address the macroeconomic imbalances may be painful in the near term but the positive credibility effects could ease the transition and potentially set the stage for more sustainable growth down the road. Without an agreement, the economic outlook looks markedly worse.
• There is a risk that the internal tensions within the Argentine government could prolong negotiations or even prevent a deal with the Fund. However, given that all alternative scenarios seemingly carry high economic and political costs, we still think the most likely scenario is that the Argentine government and the IMF reach an agreement in early 2022.

“With the mid-term elections in the rearview mirror, the Argentina government now has to address the exchange rate, fiscal, and monetary imbalances,” said Michael Heydt, Senior Vice President, Global Sovereign Ratings. “We expect the Fernandez administration to reach a deal with the Fund, but given the uncertain political landscape, the next 3-6 months present an elevated level of risk for the country.”