How should multinationals interpret Sunday’s surprising PASO results in Argentina?

Mauricio Macri’s Cambiemos coalition performed better than expected in Argentina’s PASO primaries, a sign of support for policy continuity. The results of the legislative elections in October will likely emulate or improve upon the governing coalition’s results in the PASO. As such, the Argentine peso will recover much of its losses incurred during the previous month. MNCs should interpret this result as strong popular support for Cambiemos’ mandate, and begin taking actions to take advantage of solidified political capital.

Markets and economy on a steady course, but some volatility remains

Markets reacted very favorably to the PASO results on Monday morning. The Argentine peso strengthened to as much as ARS/US$ 17.14, approximately a 3.4% appreciation. This is significant for MNCs for two reasons:

  • The Argentine peso had depreciated more than 8% against the US dollar since June 24, but is likely to regain ground: The rapid depreciation of the peso during the previous month was directly due to fears of a populist backlash of the Macri administration’s economic policies. The most symbolic representation of this fear was the Senatorial election in the Buenos Aires province between former president Cristina Kirchner and Cambiemos’ candidate Esteban Bullrich. Most private polls before the PASO suggested that Kirchner would defeat Bullrich by 2-5 percentage points. However, the result of a technical tie suggests that the ruling coalition has a stronger support base within the nation’s largest electorate than expected. As such, the value of the Argentine peso will likely be stronger and more stable than right before the PASO.
  • Peso appreciation will help contain inflationary pressures: The speed and severity at which the peso depreciated during the last month stoked fears of a pass-through effect on domestic prices. Depreciating currencies make imports more expensive, and producers eventually pass on these higher prices to consumers. An uptick in inflation would have cut into MNC’s profits, hurt consumer confidence, and ultimately worsened the Macri administration’s political capital. However, the appreciation following the election results show that inflationary effects will be mitigated or erased entirely. 

Scenarios for October’s legislative elections

MNCs must understand that the results from the PASO are not binding, and that the electoral environment between now and October is still fluid. Two months of economic data will be released between now and then, which could either help or hurt Cambiemos’s final vote count. However, robust economic data from the last few months suggests that economic recovery is on a steady, if not improving, path. Therefore, FSG is strengthening its view that Cambiemos either maintains or improves upon its PASO performance, strengthening its position in Congress.

  • Economic indicators from May and June suggest accelerating recovery: Economic activity expanded 3.3% YOY in June, higher than expected. More significantly, industrial production expanded for the first time during the Macri presidency in May, and surged to a 6.6% YOY expansion in June. The positive economic trends may accelerate following the PASO results due to earlier improvements to consumer and investment confidence. This has the potential to create a compounding effect on the election results in October. A survey by the Program of Public Opinion from Universidad Abierta Interamericana suggested that 70% of voters will decide based on the current situation of the country. This means that improved economic results could win Cambiemos more votes in October than from the PASO.
  • Poor results from a fragmented opposition, combined with a strong anti-Kirchner sentiment, may defect voters to Cambiemos: Argentina’s opposition is divided into three camps- Cristina Kirchner and her allies, the separate Justicialist Party, and the 1País coalition led by Sergio Massa. The 1País ticket, featuring Massa himself, finished with a disappointing 15.53% of the vote in the Province of Buenos Aires. The 1País coalition likens themselves to a both anti-Kirchner and anti-Macri movement. That said, the opposition to Cristina Kirchner is stronger than that of Cambiemos. Voters of 1País and perhaps the Justicialist Party may consider their party’s low-likelihood of victory, choose the lesser of two evils between Bullrich and Kirchner, and change their vote in October. This has the potential to benefit Cambiemos not only in the Buenos Aires Province, but also nationwide. 

Actions to take 

MNCs should consider the following strategies leading up to and after the October legislative elections:

  • Financial hedging to avoid unexpected FX volatility: This is an opportune moment for MNCs to take advantage of the strong FX market to hedge against FX volatility. Derivatives such as forwards or options have more attractive payoffs in October now than they did during the last month. Even though FSG expects the exchange rate in October to be approximately the same as now, the past month has shown that the peso is heavily susceptible to political uncertainty.
  • Change or execute go-to-market strategy to capture recovery in consumer demand: Consumer confidence will improve and inflation expectations will fall following the PASO results. This could result in an earlier consumption recovery, and B2C companies should have a plan in place to take advantage. B2C companies should also consider executing their plans sooner rather than later, now that layers of uncertainty have been removed. B2G companies should continue to take advantage of high government spending in 2017, while B2B companies should be poised to capture improving business confidence.

FSG does not rule out the possibility of a less fortunate PASO outcome in October. As discussed in the previous blog, the 2015 PASO predicted the presidential elections rather poorly. That said, the results of the PASO give FSG a clear result to strengthen our conviction that Cambiemos will win seats in October.


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