Argentinian voters blew their country’s presidential race wide open on October 25 with an unexpectedly close vote that will force the country’s first-ever runoff election on November 22.
But the victor of that contest will receive a dubious prize: Argentina’s next president will have to deal with a stalled economy, dwindling foreign exchange reserves, an overvalued currency, and a large budget gap.
Polls conducted just before the recent vote suggested that Daniel Scioli, who served as vice-president under the late President Nestor Kirchner and has the support of the current president (and Nestor’s wife), Cristina Kirchner, would win by a comfortable margin. All he managed was a narrow victory (36.9 percent to 34.3 percent) over Buenos Aires Mayor Mauricio Macri, a pro-business candidate who hopes to reverse many of the current administration’s policies. Argentina’s benchmark equity index rallied 9 percent in the three days after the vote.
Credit Suisse believes that both Scioli and Macri would move quickly to negotiate an agreement with Argentina’s international creditors, with a deal as early as mid-2016. After Argentina defaulted on sovereign bonds in 2001, most creditors swapped their existing debt for new paper in 2005 and 2010, taking a considerable haircut in the process. But a small group of holdouts sued Argentina for full repayment, and a U.S. federal judge has ruled repeatedly in their favor. Kirchner refused to pay, and Argentina has been shut out of international capital markets for 14 years as a result. Blocked by American courts in 2012 from making further interest payments on the new bonds before settling with the holdouts, Argentina defaulted again in July 2014.
The government has had to rely on its foreign exchange reserves to pay other debts and its energy needs. In 2014, Argentina, a net importer of both oil and natural gas, bought some 87,000 barrels per day of petroleum products (roughly half of which came from the United States). In 2013, the country brought in 184 billion cubic feet of Bolivian natural gas. Argentina has also used up significant reserves to defend the peso. They’ve barely managed the latter, as the currency has still depreciated 62 percent against the dollar in the past two years. Credit Suisse expects that gross foreign reserves will dwindle to $25.2 billion by the end of December – less than half their 2010 levels.