Argentina’s economy foundering on eve of general election

Opinion polls are neck and neck before Sunday’s presidential election in Argentina. The run-off vote will pit Sérgio Massa, the centrist candidate from the governing Peronist coalition, against hard-right libertarian Javier Milei.

In October’s first-round ballot, Massa – the current finance minister – won 37 percent of the vote. Milei, meanwhile, convinced just 30 percent of the voting public. Candidates must secure 45 percent of the vote to win in the first round.

Last month’s result surprised many political pollsters, given that Massa is presiding over an economy with an inflation rate of 142.7 percent, coupled with simmering frustrations about Argentina’s Peronist establishment.

On top of well-timed welfare handouts, Massa’s opening victory was influenced by a successful marketing campaign which warned of spikes in utility prices in the event that Milei, who has pledged to roll back state subsidies, wins.

Milei, a former TV personality turned congressman, is a political outsider who has drawn parallels with Donald Trump. Along with his hardline running mate Victoria Villarruel, Milei has downplayed the atrocities of Argentina’s military dictatorship.

His success has been fuelled by years of economic frustration. With four in 10 Argentines now living in poverty, the economy is edging towards its sixth recession in a decade. Inflation, a key concern among voters, is in triple digits and rising.

“The price of basic goods has skyrocketed,” said Jorge Lopez, a taxi driver from Buenos Aires. “The money I make buys me less and less. It’s simply not enough, and it’s getting harder to make ends meet.”

Still, Mile’s rhetoric has proved divisive. In a country where two-thirds of the population is Roman Catholic, his unflattering description of the Pope, an Argentian, as “a leftist son of a bitch” alienated moderate voters. He has also championed the sale of human organs.

Massa, though part of a left-wing Peronist administration, represents the more centrist wing of the party.

Peronists, who first came to power in 1946 under populist general Juan Perón, have been Argentina’s dominant political force for decades. Today, Peronism represents a patchwork of economic programs, including state-led industrial policy and subsidies for basic goods.

A seasoned operator, Massa is seen as someone able to negotiate across the political aisle. In August, he successfully brokered a $7.5bn payout from the International Monetary Fund (IMF).

The two candidates have opposing views on virtually every economic issue, including the size and role of the state.

‘Another debt restructuring likely’

“Massa will toe the Peronist line, attempting to roll back subsidies without endangering the welfare state,” says Pablo Bortz, a professor of macroeconomics at the University of San Martín.

Massa, who remains in charge of state coffers, spent heavily in the run-up to October’s election. He expanded income tax exemptions, boosted informal worker handouts and gave $100 – at the official exchange rate, which is 2.5 times less than the informal grey market rate – to pensioners.

To be sure, many of these measures are likely to be reversed after December 10, when a new government will assume office. “Massa is aware he’ll have to implement austerity measures … He’s now talking about a budget surplus of 1 percent of GDP next year,” said Bortz.

Last year, Argentina ran a budget deficit – where expenditure exceeds revenues –  of 2.4 percent of GDP.

Argentina still owes roughly $43bn to the IMF and $65bn to external bondholders from debt restructured in 2020. Looking ahead, numerous obligations are due in 2024 and 2025. “To repay these debts, Massa has hinted at gradual fiscal consolidation,” Bortz added.

Milei, meanwhile, has pledged to slash government spending by a whopping 15 percent of GDP. His austerity programmes would focus on removing subsidies for utilities, like gas and electricity. He has also hinted at privatising state companies and scaling back public health expenditure.

“Clearly, this radical program spooked some voters,” said Bortz. “Massa’s plan is more politically feasible, given Peronism’s support in Congress. But even if he wins, he’d have to contend with very low reserves and no access to international capital markets.”

The Central Bank of Argentina (BCRA) has drained its foreign exchange reserves to support the peso, which suffered from pronounced devaluations in recent years. This, in turn, has undermined the government’s ability to repay its debt.

“I think another debt restructuring is likely next year, irrespective of who wins. To restore debt onto a sustainable path, the government will have to impose austerity and economic reforms, which could spark protests. Still, they’ll be much tamer if Massa wins,” Bortz added.

‘Prices are so high’

For voters like Malena Pesce, a teacher working in San Isidro, a suburb of Argentina’s capital, inflation and cost of living are big issues going into the upcoming election.

“Prices are so high it affects how much food I can buy. I’ve also had to cut back on recreational activities, like going out to dinner or the movies, with my kids,” she said.

Inflation is not new in Argentina, averaging 50 percent from 2018 to 2022. The additional rise in prices since then can be chalked up to several factors.

The war in Ukraine and the subsequent US Federal Reserve tightening campaign saw the value of the peso plunge, making imports more expensive. Then, a punishing drought earlier this year blighted millions of acres of corn, wheat and soy, crimping peso demand even further.

Argentina also has a history of fiscal negligence. The government has defaulted on its debt nine times since independence in 1816. During periods of stress, authorities have periodically reverted to printing money to finance the deficit, which can raise inflation.

Massa himself oversaw central bank money-printing to cover budget shortfalls. On this point, Milei has said that “eliminating the central bank is essential”. He sees the BCRA as inflation-stoking and state-captured.

“Milei’s plan to remove the central bank is high-risk and would ensure the loss of monetary authority in Argentina,” Matias Vernengo, a former BCRA official, told Al Jazeera.

To carry out his plan, the self-described “anarcho-capitalist” has floated the idea of ditching the peso, which he has described as being worth less than “excrement”, and dollarising – adopting the greenback as Argentina’s sole legal tender.

But such a move would involve “rescinding the ability to borrow in our own currency and tying us to the US money supply … which would straight-jacket our ability to pursue expansionary growth policies, which Argentina needs,” Vernengo said.

“Dollarisation would also require a stock of dollars to act as a liquidity buffer. As the BCRA has dwindling reserves, ditching the peso risks sparking a real currency collapse, banking sector jitters and social unrest. It could be disastrous,” he added.

“So, Massa’s approach to lower central bank funding and reduce the country’s deficit is more likely to hold water. That said, he’ll have to get lucky to bring down prices. If the US Federal Reserve were to lower rates next year, it would certainly help,” said Vernengo.

Monetary policy has been the most talked-about policy issue in this election. “Managing inflation in Argentina is anything but easy, and I expect prices to continue climbing, whoever wins. That said, we could tip into hyperinflation if Milei gets his way,” warned Vernengo.

Pesce, the teacher, maintained a positive outlook: “In spite of everything, I remain optimistic about Argentina. My hope is that working people can one day buy food and pay their bills, maybe even go on vacation … to meet the basic needs of a decent life.”

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