RGE’s Wednesday Note – Uncertainty Now, Stability Later for Argentina

The sudden death of former president Néstor Kirchner, widely considered Argentina’s most powerful politician, has called into question the sustainability of the current administration’s mandate. In the short term, Kirchner’s death will fuel political uncertainty, especially regarding who will represent the Peronist Party in next October’s presidential elections. In the medium term, however, the death of the man widely thought to be the power behind the current president—his wife Cristina Fernández de Kirchner—opens the door for greater political stability.

Since her party lost control of Congress in December 2009, Fernández has been clashing with the opposition. Backed by her husband and his network of supporters within the ruling coalition, Fernández has instituted drastic measures, like the ousting of central bank governor Martin Redrado and the use of reserves to finance government debt. Without Kirchner’s political sway—and with sky-high inflation (estimated at above 25%) cutting into her political capital—Fernández will have to stay on the straight and narrow in the short term to keep her governing partnership intact. Although the disintegration of the coalition appears avoidable—given the institutional support that Peronist Party members, allies and opposition leaders are demonstrating—defections might occur, and cabinet reshuffles should not be ruled out.

In “Political Uncertainty in Argentina,” available exclusively to clients, we assert that Kirchner’s death means a more market-friendly leader is likely to replace Fernández, whether or not her Peronist Party stays at the helm. Investors seem to agree: The news on October 27 drove up prices for USD-denominated restructured Argentine sovereign bonds, with the Global 2033 Discount bonds rising two points and the Global 2038 Par bonds gaining 0.812.

Kirchner’s death at age 60 from a heart attack leaves open his congressional seat and, more importantly, his position as leader of the Peronist Party. In the buzz about who might represent the party next October in his absence, the name that keeps coming up is that of Daniel Scioli, the governor of the province of Buenos Aires (where around 50% of the electorate resides). Scioli served as vice president under Kirchner in 2003-07 and has been the president of the Justicialist Party (under the Peronist umbrella) since June 2009. His opposition to some of Fernández’s unpopular political decisions has gained him a reputation as a relatively market-friendly candidate. For similar reasons, Carlos Reutemann, the former governor of Santa Fe and a popular Peronist leader, could take the nomination. Eduardo Duhalde, who served as interim president in 2002-03, and Mauricio Macry, the mayor of Buenos Aires, also have surfaced as possible contenders.

Though it remains unclear who will fill the void in the Peronist Party, we are confident that

Kirchner’s death heralds a more stable medium-term outlook for Argentina’s economy. And in the near term, despite the appearance of political uncertainty, we anticipate no surprises from the Casa Rosada as the president is forced to steer clear of the power-centralizing governance style her husband espoused.

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