Populist Policies Pose Risks

President Cristina Fernández, who will stand for a second term as the candidate of the FPV faction of the Justicialist Party (PJ) on October 23, won 50.2% of all votes cast in a nationwide open-primary election held in mid-August.

Fernández can win re-election in the first round of voting with 45% of the vote in October, and she can avoid a run-off contest with just 40% of the vote if she finishes more than 10 percentage points ahead of the second-place finisher. The runner-up in the primary election won barely more than 12% of the vote. On that basis, the incumbent is heavily favored to secure another four-year term, most likely without need for a second round of voting.

The president has made clear that she views another term as an opportunity to deepen the interventionist approach to economic management that is the chief legacy of her late husband, Nestor Kirchner, the former president and founder of the FPV who died after suffering a heart attack in late October 2010.

The government’s unorthodox policy approach has produced strong growth and shrinking unemployment, but the expansionary Kirchnerist model cannot be sustained indefinitely, especially as the periodic resort to populist demagoguery has created an obstacle to attracting the foreign investment that might provide the government with a reliable source of non-debt financing.

Fernández has given no indication that she intends to address these risks, and she faces no strong immediate pressure to do so, as real GDP growth is forecast to top 7% this year. However, the poor outlook for the global economy points to a heightened risk of fiscal instability as the president begins a second term in 2012.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES Fernández Majority 65% Divided Government 25% Reformist PJ 10%
RISK FACTORS CURRENT
Turmoil Moderate Same SLIGHTLY MORE SLIGHTLY MORE
Investment
  Equity Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Operations High SLIGHTLY MORE Same SLIGHTLY LESS
  Taxation Moderate SLIGHTLY MORE Same SLIGHTLY MORE
  Repatriation Moderate Same Same Same
  Exchange Moderate SLIGHTLY MORE SLIGHTLY MORE Same
Trade
  Tariffs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Other Barriers High SLIGHTLY MORE SLIGHTLY MORE Same
  Payment Delays Moderate SLIGHTLY MORE SLIGHTLY MORE SLIGHTLY MORE
Economic Policy
  Expansion Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Labor Costs Moderate SLIGHTLY MORE SLIGHTLY MORE Same
  Foreign Debt Very High Same SLIGHTLY MORE SLIGHTLY LESS

SUMMARY OF FIVE-YEAR FORECAST

 

REGIMES & PROBABILITIES

Divided Government 50% FPV-led Coalition 35% Reformist PJ 15%
RISK FACTORS BASE  
Turmoil Moderate SLIGHTLY MORE Same SLIGHTLY MORE
Restrictions
   Investment Moderate Same SLIGHTLY MORE Same
   Trade Moderate Same Same SLIGHTLY LESS
Economic Problems
   Domestic Moderate SLIGHTLY MORE MORE SLIGHTLY MORE
   International High Same SLIGHTLY MORE SLIGHTLY LESS
   * When present, indicates forecast of a new regime

For more information, check out the Argentina Full Report!