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A vote for change
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A vote for change in Argentina
Jun 30th 2009
From the Economist Intelligence Unit ViewsWire

Argentina's president is dealt a blow in congressional elections

President Cristina Fernández’s Peronist ruling party suffered a major defeat, losing its legislative majority, in the nationwide June 28th congressional elections. Argentineans have clearly voted against Ms Fernández and her husband, Nestór Kirchner, the former president and leader of the Peronists. It is less clear what they have voted for, however.

The newly empowered opposition included candidates with a wide range of views, including on economic policy. In addition, the new lawmakers will not take up their seats until December. The country faces many month of uncertainty in the meantime

Ms Fernández Victory Front (Frente para la Victory, FV) lost all key battleground districts, including Buenos Aires Province accounting for nearly 40% of the 28m person electorate. Mr Kirchner led the FV’s ticket there, but came in second to a somewhat eccentric, millionaire Peronist dissident candidate aligned with Mauricio Macri, the popular mayor of Buenos Aires City.

Mr Macri’s candidate for Buenos Aires City, Gabriela Michetti, also came in first. This makes he and his party coalition Unión Pro big winners and paves the way for his potential entry in the 2011 presidential contest.

In Santa Fe Province, the fourth-largest electoral district, former Kirchner ally Carlos Reutemann won a key Senate race and strengthening his already declared presidential ambitions. Julio Cobos, Ms Fernández’s own vice-president, won a landslide 20-point Senate race in Mendoza, the fifth largest electoral district. This makes Mr Cobos another likely presidential candidate in 2011.

The Kirchners even lost in Santa Cruz (albeit by a small margin), a province that they have ruled for about 20 years. For most Argentineans this is a turning-point election, but there are few certainties about how it will affect policy before the new Congress assumes power on December 10th.

The farmers’ revenge
It is difficult to dissociate the Kirchners’ defeat from their row with farmers that exploded in March 2008, leading to four months of nationwide protests following plan to increase farm export taxes. Although their export tax was ultimately defeated by a tie-breaking Senate vote (made by Mr Cobos), the ruling couple remained intransigent with the farmers and continued to meddle in the sector through, for example, the nationalisation of the grain trade permits system in March 2009.

When Ms Fernández assumed power in December 2007, her popularity rating was nearly 60%. Several months later, in the midst of her confrontation with the farmers, it dropped to nearly 20% and never fully recovered. Today, her approval rating is estimated at a mere 30%. In contrast to the president, the principal winners in this election defended the farmers.

The farm debacle, however, is not the only issue that brought down the Kirchners. Large portions of the Argentinean electorate voted for the opposition because they were disenchanted with the confrontational, Chávez-style interventions and increasingly worrying economic indicators. The electorate has been facing double-digit inflation for several years now (although this is officially denied through the presidential couple’s politically costly manipulation of official statistics). Voters are now muddling through a year in which we expect GDP to contract by 3.5%.

Moreover, Argentineans saw their private retirement funds, amounting to nearly US$30bn, nationalised in October 2008, which many refer to as government confiscation. This move dealt a blow to the Buenos Aires Stock Exchange where the private funds were traded and led to the government having a controlling stake in a number of private companies.

Death by guillotine
One local analyst described the Kirchners’ defeat as death by guillotine, swift and clean. To the relief of many, Mr Kirchner gracefully accepted defeat in a publicly televised address the morning of June 29th by what he referred to as a “small two points” (his opponent Francisco de Narváez of Unión PRO won by 2.5 percentage points in Buenos Aires Province).

As of December 10th, the Kirchners and their allies will officially have 103 deputies (out of 257) and 36 senators (out of 72). Although they remain the most widely represented party, they will not have the necessary majority to pass legislation. It appears, therefore, that their confrontational-style politics will have to give way to a more conciliatory approach in order to push through their agenda. It is still unclear, however, what will happen in the short-term before the congressional delegates assume power in December and begin proposing policy in March 2010, after Argentina’s long summer holiday.

The country is facing a six-to-nine month period where anything seems possible. Indeed, the day after the election, the Minister of Health resigned amidst an extremely dangerous mid-winter outbreak of the H1N1 virus (also known as swine flu). Argentina, together with Chile and Mexico, has been the most affected in the region with its province of Santa Fe already announcing the cancellation of all schools for a month and health facilities overloaded in Buenos Aires City and Province.

As of June 29th there are 1,488 confirmed cases of swine flu in Argentina, with 23 deaths related to the virus having been reported. At present, concern for the leadership vacuum and how the Kirchners may respond to their defeat in the coming months appears to be overshadowing the promise for real political change.

The opposition’s plans
In the next several months, the winners of the mid-term election will be formulating their policies. If they stick to their campaign promises and can push measures through a closely divided Congress, Argentina’s economic model will likely change from early 2010. It is unlikely that the Kirchners will be able to continue with their current spending spree and their interventionist policies in 2010, especially as they relate to farm exports.

During the campaign, Mr Macri even went so far as to say that he would consider the re-privatisation of the pension system and of Aereolineas Argentinas (which the Kirchners took over from the Spanish company Marsans in late 2008). It is doubtful whether his winning candidate in Buenos Aires Province Mr de Narváez agrees, but the direction of change is obvious.

Mr de Narváez’s economic agenda will focus on the broadening of unemployment insurance and on creating fiscal and investment incentives for small and medium size companies to employ young people between the ages of 17 and 24 (who are most susceptible to delinquency and drug use, which have been on the rise). He also calls for the exemption from the 21% VAT tax for products that make up the basic food basket.

With regards to the agricultural sector, Mr Narváez calls for the gradual lowering of export retentions and the segmentation of taxes by crop and regions. In addition to a more nuanced tax regime, he proposes to create more transparency in the meat, dairy and grain trades. He also calls for the creation of a new agricultural emergency law to help mitigate the drop in world demand and prices for primary products.

Ms Michetti, the winner for Unión PRO in Buenos Aires City, also looks to strengthen small and medium size businesses with incentives while “promoting free competition without taking away the state’s regulatory function”.

There was, however, one surprise winner in Buenos Aires City which could counteract the Unión Pro’s conservatism. Pino Solanas, a former filmmaker and leftist candidate for the Southern Project (Proyecto Sur), surprised everyone with his second-place win in the city. He beat out the centrist, former presidential candidate Elisa Carrió’s candidate, Alfonso Prat-Gay, the former head of Argentina’s Central Bank under President Eduardo Duhalde.

Mr Solanas is independent of the Kirchners -- whose candidate for the City, Carlos Heller, came in a distant fourth -- but his congressional votes may not diverge too drastically from the Kirchners’ agenda. Mr Solanas, for example, openly supported the Kirchners’ nationalisation of the pension system.

What next?
Despite their overwhelming electoral defeat, it remains very unlikely that the Kirchners will do a quick 180-degree turn-about. Nor is it likely that the election results themselves will restore Argentineans’ confidence in the economy and prompt people to run out and buy expensive houses, cars and other durable goods. The Kirchners maintain a majority in congress until December.

That said, the Buenos Aires stock exchange reacted to the electoral results with a 1.4% rise. And the price of Argentinean bonds increased by more than five percentage points following Mr Kirchner’s announcement that he will resign as leader of the Peronist party. These positive signs, however, do not guarantee a soft landing for an economy that is contracting after seven years of solid growth.

The Kirchners will hopefully provide leadership to navigate the serious health crisis and soften their stance toward the opposition to work toward consensual policies for the economy. Such an approach would allow them to exit gracefully with their dignity intact. A confrontational, take-no-prisoners approach would further destabilise Argentina economically, socially and politically.