Times a-changin’ in Argentina?

The surprise outcome of the presidential election in Argentina has raised the prospect of a shift towards more market-friendly policymaking, following 12 years of populism under successive Kirchner governments. The markets have rallied on the news, with equities gaining 5% and the peso strengthening by 3% against the dollar in the black market. Most of the attention has focussed on the prospects for a deal with the “holdouts” left over from Argentina’s default in 2001, which would pave the way for re-entry to global capital markets. Our sense, though, is that investors should focus more on the likelihood of a step-change in broader macro policy – with the priorities being tighter fiscal and monetary policy to reign in the budget deficit and inflation, and a weaker currency to restore external competitiveness. While it’s true that the opposition candidate, Mauricio Macri, has talked a good game on all of these issues, the government-backed candidate, Daniel Scioli, benefits from a formidable election machine. We suspect he is still the marginal favourite – meaning that markets may have got a little ahead of themselves.