Argentina will hold Presidential elections on 22 October. Three candidates will compete for the Presidency: (i) the current Finance Minister Sergio Massa for the incumbent Peronist party (ii) leader of the opposition and former Security Minister Patricia Bullrich, and (iii) Javier Milei, a libertarian economist. Regardless of who is elected, the new President will face a difficult economic situation with two main hurdles.
Problem #1: A history of fiscal mismanagement
Argentina ran a primary deficit in every year between 1960 and 1990 and in more than half of the last 30 years. Given its history of debt defaults, it has been unable to access international debt markets at reasonable conditions to finance spending. Therefore, without resorting to higher taxes, the government reverted to the central bank (BCRA) to finance spending. The BCRA has financed fiscal deficits by printing money or by using international reserves.
The need to sterilize quasi-fiscal spending has led to a rapid increase in the stock of LELIQ notes since their creation in 2018 to USD 54 billion. This is equivalent to 8% of GDP and more than 70% of all BCRA’s current remunerated liabilities. The interest rate on these has increased from 60% in 2018 to close to 120% annualised in 2023. Therefore, the large stock of LELIQ in the market, and the high interest rate paid on these, has fuelled expectations of future higher financing needs and additional money printing, further increasing inflation expectations.
Problem #2: A weak currency with multiple exchange rates
The use of capital controls and international reserves to limit the depreciation of the currency has not been successful. A parallel unofficial exchange rate has developed, called the blue dollar, which has depreciated at a faster rate and currently trades at double the official rate. In recent years, government initiatives to deter the use of the blue dollar and promote exports resulted in the creation of multiple exchange rates to be used by different sectors. At the time of writing this report, Argentina has 16 different exchange rates versus the dollar.
Following the primary elections, Finance Minister Massa announced a devaluation of the peso of 22%, which still fell short of the 60% devaluation included as one of the conditions stipulated in the IMF loan review. Argentina has consistently missed the target goals of that program.
Ahead of the Presidential elections in October, none of the candidates have offered a credible plan to solve the crisis. The economic scenario is therefore likely to get worse before it starts to improve and, as a result, asset prices in Argentina will remain volatile ahead of the election. Unless there is a clear shift in attitude towards a negotiated solution between parties, a deep crisis remains the most likely outcome.