Macri Ready for Midterms

The early signs suggest that the coming mid-term elections could favour Argentina’s pro-business government, write Control Risks Analysts Marcelo Sumi and Thomaz Favaro…

Since coming to power in December 2015 Argentine President Mauricio Macri’s wide-ranging reforms have attracted worldwide investor attention. It was a radical change after more than a decade of protectionist and heterodox economic policies under former presidents Néstor Kirchner (2003-07) and Cristina Fernández (2007-15). However, electoral dynamics have also limited the pace and scope of government reforms since the beginning of the year and brought congressional activity to a virtual halt. Moreover, Macri’s reforms remain unfinished and their lasting impact will depend on how the ruling Cambiemos (“Let’s change”) coalition performs in the upcoming midterm elections in October.

Despite these short-term governability challenges and a potential reshaping of the opposition in Congress, however, Control Risks believes that Cambiemos is likely to succeed in adding seats in the national legislature, helping Macri advance his economic reforms in the next two years.

The electoral battlefront

Half the seats in the Chamber of Deputies (lower house) and a third of the Senate (upper house) are up for grabs in the midterms. In August, prior to the October midterms, citizens voted in the mandatory open primaries (known as PASO) to select parties’ candidates. These primaries commonly serve as a barometer for the upcoming elections, and markets were buoyed by the solid performance of Macri’s ruling Cambiemos coalition.

From the outside, it may seem that the dispute will be highly polarised between two main contenders: the Cambiemos coalition, and the main faction of the Peronist movement, the Front for Victory (FPV) coalition linked to former President Fernández. However, another key contender will be the 1PAIS coalition, established by the Renewal Front (FR) of presidential hopeful Sergio Massa and the Generation for a National Encounter (GEN) led by Deputy Margarita Stolbizer. The alliance is attempting to take advantage of the Cambiemos-FPV schism and present itself as a “third way” by appealing to voters from the centre of the political spectrum or those alienated by the current polarisation. However, overall support for the group remains limited, and it seems unlikely at this stage to poll ahead of the two main contenders in October.

The election’s impact

This electoral cycle and the President’s lack of a majority in Congress have produced a legislative stalemate; activity has been brought to a virtual halt since the beginning of this year. The government has refrained from pushing new legislation in the past few months to avoid political defeats ahead of elections. The government has also limited the implementation of key economic measures, even when congressional authorisation was unnecessary, due to electoral concerns. Despite welcome signs of economic recovery, Macri’s reforms have also been perceived as elitist by a significant portion of society. Concerns about losing congressional seats led the government to hold back on initiatives deemed unpopular, including major budget cuts and reducing the pace of subsidy cuts and tariff hikes. Increases in gas and electricity tariffs in 2016 had resulted in social unrest and were widely used by the opposition to criticise the government.

"Despite welcome signs of economic recovery, Macri’s reforms have also been perceived as elitist by a significant portion of society…"

The looming election has clearly had a negative effect on the implementation of much-awaited reforms in the short term. However, all evidence suggests that such difficulties are unlikely to persist beyond October, especially as Macri’s Cambiemos seems well placed to expand its presence in the legislature. The coalition will likely benefit from Argentina’s recovering economy and gradual reductions in inflation. At the same time, Fernández’s FPV remains weakened by internal disputes and corruption investigations, limiting prospects for an electoral comeback. Although it is virtually impossible for the ruling coalition to secure a majority in either congressional house, the likely increase in seats will improve the strength of the government’s bargaining position. In the Senate, Cambiemos will also benefit from the fact that its expansion will likely take place at the expense of the FPV, which has the most senatorial seats up for grabs in October.

Business as usual

Even in the event that Fernández wins a Senate seat, Control Risks does not anticipate major hurdles for the government’s economic policies in Congress. Her election would likely translate into a more vocal opposition to Macri and give the FPV stronger leadership at a time when the movement struggles to maintain unity, but the former President remains a controversial figure within Peronism and society more broadly. Moderate Peronist factions will have further incentives to distance themselves from the FPV, especially as senior members of the group – including Fernández – continue to face corruption probes.

As Argentine politics return to business as usual in November, so will the incentives for moderate Peronist factions and provincial governors to resume cooperation with the government. Since Macri took office in December 2015, these groups played a crucial role in securing votes for government-sponsored legislation in Congress. Governors were of particular relevance, as the electoral system grants them considerable influence over lawmakers from their provinces; meanwhile, provinces are highly dependent on money from the central government, a fact widely exploited by Macri in his strategy for dealing with the legislature. Once Congress overcomes its current paralysis, Control Risks believes both moderate Peronists and governors will continue to play a key role in ensuring governability and broader stability, and help keep the flow of good news from Buenos Aires coming for foreign investors.