On August 13, Argentina held its open primary elections (Elecciones Primarias Abiertas Simultáneas y Obligatorias or “PASO”). While the ostensible goal of the PASO is to narrow intra-party competition, its accessibility to all voters often serves as straw poll on overall popularity and, therefore, general election outcomes.

The Political Fallout

69% of eligible voters participated.  As a result of the PASO, the following candidates are eligible to stand for election to the office of president to be held on October 22:

• Javier Milei (Libertarian Party). A surprising 30.04% for outlier (third-party) candidate.
• Patricia Bullrich (Conservative Coalition). Her coalition received 27.28% of the vote.
• Sergio Massa (Kirchnerist/Peronist Coalition). The coalition behind the current de facto president (a “Super-Minister” with broad power) received just over 27%
• Juan Schiaretti (Independent Peronist) obtained less than 4%.
• Miryam Bregman (Left) received less than 3%.

Milei, an outsider with almost no territorial or party support, managed to channel the vote of the many constituents tired of two decades of marked by high inflation and limited growth.

Economic Turbulence

As in 2019, the PASO has already triggered a market response. The dollar skyrocketed relative to the peso, equities dropped massively, as did sovereign bonds. Whether a planned response or purely reactionary, the Government devalued the currency 21.4%, now offering AR$365 per dollar (on Friday, the same offered rate was AR$ 287). To contain pressure on the FX rate, the Central Bank elevated the domestic interest rate on one-year peso-denominated obligations to 209%.

The abrupt devaluation is clearly an attempt to encourage commodity exports (many of which have been stored pending a more favorable exchange rate) and, thus, prop up almost nonexistent reserves. It may also have been a part of an agreement with the IMF as a condition to a debt rollover with the multilateral entity.

The market exchange rate and other exchange rates used for targeted sectors and means have also spiked. And with these increases, Argentina’s biggest bugbear—inflation—will likely resume its rampage through the domestic market, slowed only, perhaps, by the country’s signaling of recession.

Forward Looking

The repudiation vote to punish the two traditional parties/coalitions has greatly increased uncertainty about electoral outcome and governability. For the near-term and likely through the October 22^nd elections, we foresee the government:

• Not relaxing any of the restrictions on outbound remittances of funds. This means both published rules and current, opaque practices that serve as de facto restrictions will stay in place.
• Seeking to avoid another significant devaluation of the official rate and, to the extent possible, taming the parallel (market) rates to contain inflation. Look for more price controls on essential goods and services.

The current administration merely wishes to reach the October election, perhaps to a runoff (scheduled for November 19) and, in the very likely event it loses (badly) in the general election, deliver the ticking timebomb to the next administration. The PASO portends a runoff between the leading opposition candidates, Mr. Milei and Ms. Bullrich. With either of them in office, the Argentine economy will once again be forced to devalue abruptly.

We will keep you posted of any development.