The conditioned Pavlov response
As expected, and yet imprudently, the government’s economic direction further embraced the Vice President´s “textbook” recommendations after the adverse results in the September primary elections. Like a conditioned Pavlov response to the stimulus of an anticipated electoral defeat, the government announced new fiscal expansion measures in an economy that has not yet digested the consequences of last year’s economic shock and fiscal misalignments.
The economic interpretations of those new measures are also quite straightforward. In a strained local debt market, more fiscal spending implies more monetization of the fiscal deficit, which generates more need for sterilization, which triggers rising devaluation and inflation expectations. This was seen in the latest widening in the FX spread (see our "Inflation/monetary policy" section below for more details).
Additionally, the fiscal measures came hand in hand with the change of the Secretary of Domestic Commerce (now, a more “confrontational” Roberto Feletti), who was quick to unilaterally announce a new round of price controls, on fewer goods than before, but with more stringent price levels.
Needless to say, these sorts of electoral measures are not conducive to improving Argentina´s macro outlook and are thereby aggravating market concerns about local assets.
But the truly interesting question is what effect this Pavlovian response will have on the voter. Is a relaxation of the fiscal stance, in an environment of low political credibility and concerns about macro stability in the government’s best interest? Will it reverse the adverse electoral outlook?
Other presidents, with differing ideologies, and either explicit or implicit economic models, used fiscal coherence as a political message of governability, achieving high voter acceptance rates during those times. Both Carlos Menem and Nestor Kirchner, two very different politicians, used the concept of fiscal coherence as a political message to the voter.
Even Alberto Fernandez who, in 2020 publicly disregarded the economic costs of the COVID management, started this year to reduce the fiscal imbalance, thanks to higher-than-expected revenues and enough discipline to avoid giving in to higher spending requests.
But Cristina Fernández de Kirchner seems to perceive a more linear relationship between fiscal spending and voter support. Or, at least, she believes that the government must spend the additional revenues to reach the original fiscal projections, so as to overcome the electoral challenge of the primaries.
The government's objectives are clear: through increased expenditure aimed at some family income improvement, it hopes to generate a sense of economic relief from now until the mid-term elections, aided by the (also previously expected) lifting of most of the remaining COVID-related economic restrictions. The government hopes that the economic aid packages will convince more Kirchnerist and undecided voters to come out and cast their ballots. The government further hopes that a post-electoral, post-COVID economic recovery will help bring fiscal and monetary policy back on track, and particularly, defuse the Central Bank debt dynamic.
Even though one can see some recent signs of economic recovery (see the "Economic activity" section in our report for more details), such a rebound is far from certain, and precisely because of such uncertainty, to damage an already fragile fiscal stance for electoral reasons reflects the government’s above-mentioned unsurprising imprudence.
While most convinced Kirchnerist voters would probably downplay concerns about the government's being economically imprudent, many undecided voters might not. And the key for the government to reverse the adverse primary election results is to induce a rise in the voter participation rate, not only that of its own voter base but also of the “fluctuating” voters, for example, those who in 2019 supported the “Frente de Todos” (FdT) coalition after the disappointing economic performance of the “Juntos por el Cambio” (JxC) coalition. In fact, the most recent presidential election was a clear example of how “the economy” overshadowed other political considerations, such as the Vice President´s judicial problems.
If the adverse results in the primaries were indeed a reflection of voter disappointment due to economic costs suffered during the pandemic (”It’s the economy…”); and not so much other more subjective political factors (double standards during the lockdowns, lack of political cohesion, poor integration, etc), the independent “economic voter” might want an option that offers the best outlook to improve his/her income level over the coming years, i.e., prospects for rising real wages and improvement of employment potential. It might be an uphill battle for the government to send such a message when, in facing an electoral battle, it is seen as willing to push back needed macro stabilization. All this comes on top of the almost public confrontation that took place after the primaries between the president (supported by traditional Peronism and labor unions) and the Vice President. This confrontation reinforces the impression that the “coalition” is sticking together more because of electoral convenience than because of political conviction.
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