Another false dawn?

A new year, a new president… Argentina has operated something of a revolving door since 2000, with few recent incumbents likely to earn a lasting place in history. Can Nestor Kirchner break this disappointing pattern – or even serve out his full term? Trevor Utting speculates.

The tasks ahead of Argentina’s new president, Nestor Kirchner, are depressingly familiar: clinch a medium-term deal with the International Monetary Fund (IMF), restructure defaulted sovereign debt, rebuild a shattered economy, reform failed political institutions, and so on.

As if all this were not sufficiently challenging, cynical political manoeuvring by Kirchner’s opponent, Carlos Menem, has left the new president without the expected political landslide that could have bolstered his otherwise shaky political credentials. Menem has effectively denied Kirchner the strong popular mandate any leader of Argentina needs if a turnaround is to be achieved. Instead, the new president represents an unknown quantity, with a weak political powerbase reliant on old-style political fixers.

Still, perhaps the apparently left-leaning Kirchner will be another Lula? Hardly. Luiz Inácio Lula da Silva is, by comparison, an experienced politician who enjoys a strong popular mandate and the broad support of his party. By contrast, Kirchner is already facing accusations that he is simply a puppet of outgoing president Eduardo Duhalde. Another possible comparison is post-crisis Russia: many levelled similar criticisms when then-president Boris Yeltsin elevated the unknown Vladimir Putin to the Russian premiership. It is just possible that Kirchner could yet surprise his critics, but the risks look to be stacked on the downside.

At best, Moorgate Group believes that Kirchner will simply maintain the status quo, which will mean a slow and uncertain path towards eventual recovery and international rehabilitation. The IMF will just about stay onside, but economic policy and reformist zeal will disappoint, with a continued reluctance to embrace painful restructuring. Domestic populism will be tempered, however, by the reality of weak government finances, and the need to try and regain some measure of trust within the international financial community.

An unknown candidate…

Much has been made of the fact that Argentina’s latest president is an “outsider” as far as traditional Argentine politics is concerned. A former provincial governor with a relatively clean track record, Kirchner has not really formed part of the narrow, Buenos Aires-based political-business-banking nexus that has mismanaged the economy for so long. Indeed, given the poor record of Argentina’s old political elite, Kirchner has been seen as representative of a fresh start. Unfortunately, this optimistic assessment might prove a triumph of hope over experience.

…with a flawed mandate…

Kirchner was dealt his first heavy blow before the election campaign was over, when his second-round opponent Menem – staring near-certain defeat in the face – finessed the situation by simply withdrawing from the campaign. This allowed Menem to leave the fray clinging to the memory of his first-round “victory”, in which he polled more votes than Kirchner (who managed just 22%), to avoid a humiliating second-round defeat (which Kirchner was expected to win by 70% to 30%) and, at the same time, to deny his opponent a popular electoral landslide.

Kirchner might have the backing of outgoing President Duhalde’s powerbase, but he does not enjoy broad-based support across the Peronist movement. Menem’s stunt has denied the new president a popular mandate from which he could draw strength should Argentina’s internecine party politics move against him, as they surely will.

In fact, the presidential campaign merely underlined the deep divisions that still exist among Argentine voters, with none of the three main contenders able to establish a clear lead. The outcome – another Peronist president – hardly demonstrated support for genuine reform, and is a bad sign for future political stability. Governability will remain an issue throughout 2003.

Also, Kirchner’s victory – delivered at least in part by the Duhalde “machine” – has been tainted by his close association with the outgoing president. Kirchner will certainly rely on Duhalde’s ongoing support in Congress, at least until fresh elections are held later this year. Even assuming that the October polls go his way, by then the president might have lost much of the fresh impetus typically enjoyed by any new leader.

…means a hazy outlook

How will the new Kirchner administration behave? Early pronouncements have been long on rhetoric, but contained few real surprises.

The domestic economy: Here, Kirchner has sent a mixed message. Vague promises to increase state intervention, curb the power of big corporations and initiate ambitious public-works projects have spooked the financial markets, but are unlikely to be translated into action, given the weak government finances. More likely is a continuation of recent policies: stability, but little change. Outgoing President Duhalde preferred to put off tough reforms, and Kirchner might continue in this cautious vein.

Economic policy: The reappointment of Roberto Lavagna as economy minister ensures continuity, but does not suggest any radical change in policy direction. Lavagna’s presence suggests that the new government will continue to lean toward IMF-inspired austerity, but the markets are still waiting for a credible economic plan that incorporates difficult (but necessary) institutional reforms, debt restructuring and banking reform. The government’s primary surplus will have to be doubled (to around 4% GDP) if Argentina is to generate meaningful debt-service capacity, but Kirchner plans to achieve this through revenue expansion, not spending cuts. As for the US$95bn in defaulted sovereign debt, Kirchner is looking for a big reduction (70-80%) in principal, reduced interest and a multi-year rescheduling. He is quite clear in his desire to prioritise domestic recovery and poverty alleviation ahead of foreign-debt service.

The banks: With foreign investors unwilling to throw good money after bad, domestic banks represent the main (private-sector) source of credit. Unfortunately, they remain too weak to contemplate new lending. Argentine banks are still trying to make sense of the damage created by the January 2002 sovereign default. Around four-fifths of the country’s leading corporates have now restructured their domestic debts, typically incorporating a large element of forgiveness and a long-term rescheduling, but the banks are not yet granting any new loans, and a fully functioning domestic banking system could still be many years away.

Corruption: Kirchner has pledged to tackle corruption and has appointed a political outsider (and anti-corruption campaigner) to the post of foreign secretary. This sends a positive message to the international community, but can the new president really tackle corruption given his own reliance on the Peronist machine?

Foreign policy: The emphasis is on a cooler relationship with the US (plans to reopen diplomatic links with Cuba should help) and closer ties with regional neighbours, especially Brazil.

Political institutions: Almost 18 months have passed since Argentina’s default, yet the country’s failed political and legislative institutions remain largely unrestructured. Can Kirchner do any better than his predecessors? He needs to impose control over the provincial governments and courts, where many potential opponents lurk. The president has announced plans to tackle the Supreme Court – a welcome initiative, provided the “new” judges are independent. It could be argued that Kirchner’s apparent political weakness – the fact that he does not appear to be a typical Peronist strongman – could yet prove a strength, if he is able to modernise Argentina by stealth, i.e. by the reform of corrupted political and bureaucratic institutions.

Economic reality

At least the new government can bask in the glow of an economic rebound, albeit from a very low base.

Both Argentina and Brazil have outperformed in the opening part of 2003, as growth rates have picked up and currencies have recovered against the US dollar. Argentina is on track to generate 4% real growth in 2003, having achieved 5.2% in the first quarter. Exports have boomed in the aftermath of the peso devaluation, and tourism has done better than expected.

All this good news hardly compensates for five years of recession, however. The economy shrank by a quarter, and widespread poverty ensures that street protests remain a threat to democracy. Official unemployment is in excess of 20%, and with foreign investors still loath to re-enter this market (and a bankrupt domestic financial system), President Kirchner will struggle to create the conditions necessary to coax new investment into what is now a low-cost economy with prospects. A new IMF deal is a key first step, but even this is proving elusive in the face of tough demands from the fund’s G7 sponsors.

August 2003 sees the end of the existing short-term IMF deal, which Argentina needs to replace with a medium-term programme if it is to move ahead on other issues. This might prove impossible to achieve by August, however, especially since the fund is unlikely to demand anything less than strict austerity. Goodwill has long since evaporated.

Argentina will be required to impose IMF orthodoxy, which means an increased fiscal surplus, a solution to provincial budget surpluses and quasi-currencies, an improved business climate for creditors and investors, the phasing out of price controls and state intervention – little of which fits with Kirchner’s utterances thus far. Kirchner’s early decision to oppose the IMF by maintaining the temporary suspension of the bankruptcy law for another three months is hardly encouraging, although Lavagna has said this will be the last suspension.

The stakes are high: Argentina is due to repay US$2.7bn to the IMF in September 2003 and needs a deal on multilateral debt before it can open talks with private-sector investors. A deal on private debt, therefore, is unlikely to close before 2004; the terms of this will depend on many factors, including the extent of Argentine obligations elsewhere (for example, to the multilaterals and domestic creditors) and the pace and strength of any economic recovery. In the meantime, the continued absence of a comprehensive rescheduling ensures that most international lenders will continue to shun this market.

Trevor Utting is head of research for the Moorgate Group in London. For more information on Moorgate Group research, telephone +44 (0)20 7074 0007.