Argentina Elections: The Winner Takes it All

Potential scenarios for Argentina's short term economic outlook depending on who wins the runoff

Welcome Avatar! 2023 has been a wild ride for Argentina with all eyes focusing on the elections, and no one on actually running the country. After the runoff this Sunday we will know who will sit on Rivadavia’s throne from December onwards. Let’s run through some economic scenarios for the short term and 2024, depending on who wins.

Ever since the current government pushed Sergio Massa forward as the main presidential candidate, the current president Alberto Fernández disappeared from view completely and Massa has been running the show as a sort of de facto president, even though his official role is that of Minister of Economy.

Tired of the never boring Argentina, Alberto Fernández is trying to secure a salary as the future Argentine ambassador for Spain, where he wants to live out his days in peace.

It would be a lot harder for him to do the same here, since he can hardly show his face on the street without people unleashing their limitless creativity for curse words at him (this is from both sides, even current Massa voters hate his presidency).

Alberto has had many of these moments during his term (wtf happened now?)

Would be a real shame for him if Milei wins, because in that case I doubt he would be able to feed off the State some more as an ambassador.

But let’s leave Alberto and get back to the incumbent de facto president Massa and his challenger Milei.

What do the polls say?

If you haven’t had the chance to read Argentina Elections: Potential Runoff Scenarios yet I recommend that for some more background on the run up to this Sunday’s runoff (it mainly goes over where potential votes could end up).

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Argentina Elections: Potential Runoff Scenarios

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Even though polls are usually way off in Argentina, it is the only real measurement we have to base some predictions on. Looking at the most important consultancies, we get the following panorama:

Polls after the general election

As you can see, it is too close to call according to these polls. Only 2 polls give Milei a 4%+ lead, and the rest doesn’t see a scenario of a difference bigger than 3%.

Right now, the averages (Milei 50.9% / Massa 49.1%) and median (Milei 51.8% / Massa 48.2%) are too close to call.

It can really go either way, but knowing that Massa controls the State apparatus at the moment, this Mara is inclined to say that he has an edge unless Milei can really secure a difference of 5%+.

General Economic outlook

As we have seen in previous articles, the general economic outlook for Argentina is very grim in the short term, no matter who wins. Hyperinflation seems inevitable with the BCRA offering a 250%+ APR on locked pesos.

In my BowTiedBull guest post Watching a Country Fail in Real Time Due to Inflation and my Plan Bonex II: another default on the horizon? article you can read more on the current dynamics that will only accelerate inflation and possibly destroy the Argentine peso, or at least slash some zeros off it.

The situation has not improved since then, but has worsened, by a lot. The consolidated public spending keeps increasing. The average level of recent years in relation to GDP is almost 10 points higher than that of the 1990s.

By 2023 public spending is estimated at 44% of GDP:

The sum of public federal, provincial and municipal spending from 1980-2023 - Source

Of course this is not “free” and the deficit hole caused by public spending needs to be funded by more debt. Public debt levels reached a record this year at $419 billion dollars:

Record debt levels

Autist note: As a frame of reference when people start complaining about the IMF holding Argentina “in its grip”, that debt is only a small chunk of this ($40.2 billion). It is true that the IMF sets up guidelines that Argentina should follow in order to organize its economy, but Massa has shown time and time again that he doesn’t care about these goals and objectives, and prefers to run the peso printer at full speed to handout helicopter money and secure votes.

About 10-15% of that $419 billion debt is peso debt in the form of Leliqs, the peso Ponzi that needs to be unwound in order to stop inflation from spiralling completely out of control.

The positive is that this debt can be manipulated by devaluating the peso or by restructuring in a similar Bonex restructuring / semi default scenario. Argentina has close to full control over what happens to this debt.

Timeline of interest rates on pesos in Plazo Fijo (min lock period of 30 days), Leliq and APR (currently at 250%+) - Source

If nothing happens and peso rates stay at these levels, hyperinflation will be inevitable.

Still, in the grand scheme of Argentina’s black hole of sovereign debt, the peso debt is just a very tiny part. This is what maturities and coupons look like for the upcoming decades:

Sovereign debt maturities (blue) and coupons (grey) in millions, for Jan/2024 there’s rumours of Argentina defaulting, again - Source

With this you can imagine that 2024 onwards will become very tough unless the upcoming administration cuts public spending.

So let’s see some of the potential ways that Massa or Milei will deal with these challenges.

Scenario 1 - Massa Wins - no change

This is a very possible scenario. It means Massa will remain Minister of Economy until December 10, when he becomes president.

However, the official exchange rate is so behind reality that it is almost a given that he will have to devaluate the peso right after the elections (Tuesday is the first day he can do that since Monday is a public holiday). This is the official dollar rate adjusted for inflation:

Official dollar rate adjusted for inflation - Source

This fake rate has completely distorted imports (which essentially get subsidized with this rate) and is one of the main reasons for the current shortages in many areas of the economy.

Importers get currently get their settlement with the Central Bank only after 60-90 days, which is absolutely unsustainable. Many foreign providers have stopped selling to Argentina for this very reason.

This is what the current import debt looks like in USD billions:

Import debt - Source

This cannot be solved before December 10, and it is very likely we see many more shortages before this debt can be reasonably unwound.

In this scenario, inflation will keep rising since Massa does not solve or change Leliq rates. During his campaign he hasn’t indicated what kind of solution he proposes, so here we’ll pretend he let’s it run hot, and Argentina enters hyperinflation combined with product shortages.

Scenario 2 - Massa Wins - Cleanup

This is one of the most interesting scenarios from a political perspective, because it shows the games Argentine politicians are capable of.

In this cleanup scenario, Massa wins the runoff, and on the Tuesday after the elections he does not immediately devaluate the peso. Instead, he appoints a new interim (and perhaps future) Minister of Economy, so he can “focus on his presidency” and assembling his cabinet until December 10.

This new Minister of Economy is the fall guy that gets to do the dirty work, so Massa’s name does not stick to the cleanup before starting his presidency. This new Minister would devaluate the official rate by at least 40%+, and try to combine the avalanche of different exchange rates.

Massa looks forward to a fresh start

Potentially he could also restructure the Leliq peso debt, but there’s probably not enough time before December 10 to get that through. This would happen early in Massa’s presidency in this scenario, combined with severe cuts in public spending.

Once that dirty work is done, Massa fires this new Minister because “he doesn’t agree with these measures that hurt the Argentine people”. He then appoints someone else in year 2 and tries to save face with his voter base so he can secure a second term.

Scenario 3 - Milei Wins - Massa Applies Scorched Earth

This scenario is similar to Scenario 1, but with a vengeance. Massa could devaluate the official rate, blame it on Milei’s win, and bump up interest rates so the peso debt becomes even more unsustainable.

Furthermore, he would not solve a single thing around the import debt, and instead stop approving imports at the official rate altogether, without settling outstanding imports. Widespread shortages Venezuela style could ensue after this, and Massa would blame it all on Milei winning the elections.

See? This is what happens when a “neoliberal” wins.

Social groups, unions and syndicates which all respond to Peronist calls for unrest and chaos would paralyze the economy completely in “protest” against Milei.

Besides the fact that Milei doesn’t have an institutional structure and will have to rely heavily on the support of the Pro (Bullrich / Macri), this scenario would provide the social molotov cocktail Peronism needs to make sure that Milei will have very little governability.

The “Gordo Mortero”, one of the protestors on the day Macri’s presidency started. - more about this here

In this case we will see very turbulent months with social unrest, and a potentially short-lived Milei presidency that ends up with new elections and Peronists jumping in as the “saviours of the fatherland” from vile free market economics.

Scenario 4 - Milei Wins - Massa Cleanup

This scenario is similar to Scenario 2, but instead of Massa appointing a fall guy he does the work himself and solves some of the urgent issues regarding exchange rates and imports before Milei starts his presidency on December 10.

At least 50% chance this happens

For this, the following should happen:

• Devaluation of at least 40%+ for the official rate (around $505 pesos)

• Solve part of the liability bomb with importers ($55 billion USD)

This scenario is the least likely in my opinion. It would mean that Massa gets his books in order which would give Milei a head start to improve the economy.

In both #3 and #4, Milei would most likely unwind the peso debt by either a Bonex-style default, or a faster devaluation and combining all exchange rates into one.

Let me know if you have other scenarios you think could play out in the comments.

See you in the Jungle, anon!