Primary elections took place in Argentina on Sunday. The results revealed unanticipated voter preferences that give a much clearer outlook for the 24 October general elections:
- The opposition ticket representing Alberto Fernandez and former President Cristina Fernandez de Kirchner (Frente por Todos) obtained over 47% of the vote; incumbent President Mauricio Macri and Miguel Pichetto (Juntos por el Cambio) received slightly above 32%; and Roberto Lavagna claimed less than 8.5%.
- In the important Province of Buenos Aires, Axel Kicillof (Frente por Todos) came in first with over 49% of the vote, and Maria Eugenia Vidal (Juntos por el Cambio) came in second with nearly 33%.
- The incumbent party managed to stay ahead in the City of Buenos Aires, with Horacio Rodriguez Larreta obtaining over 46% of the vote, compared to the 32% received by the Frente por Todos candidate.
Electoral rules in Argentina stipulate that a presidential candidate who obtains over 45% of the vote, or 40% plus a 10% difference to the runnerup, in the first round of the general election is elected to the office. In the Province of Buenos Aires, the candidate who obtains the most votes in the general election wins. In the City of Buenos Aires, a first-round victory requires over 50% of the vote.
The opposition's primary results represent a landslide victory completely unforeseen by pollsters, experts, investors, and ourselves. Argentine assets are experiencing severe pressure as a result. Although two-and-a-half months is a still long time in Latin American electoral contests, Sunday's results point to a highly likely victory for the opposition in October, at both the national and Province of Buenos Aires levels, as well as it obtaining a majority in Congress.
We will now focus on any guidance on the economic plan to be pursued by Fernandez and Kirchner. The guidance they have offered so far is far from constructive, in our view: Fernandez and his team have suggested they would stop paying interest on Leliq notes issued by the central bank, intend to renegotiate the agreement with the IMF, and have signaled their intention to reintroduce some sort of capital controls. Unless voter intentions change drastically in October, Macri's last day in office will be 10 December, implying a long government transition of four months. The fractious relationship between the incumbent and the opposition will make this a challenging handover.
Regarding the impact of these developments on EM assets more broadly, Argentina makes up nearly 2.3% of JPMorgan's EMBI Global Diversified index of USD-denominated EM sovereign bonds, and just 0.4% of the MSCI EM equities index. Depending on the size of Argentina's sell-off, emerging markets could suffer at the index level, particularly the EMBI Global Div index. We would expect any contagion on other emerging markets stemming from developments in Argentina to be short-lived.
Alejo Czerwonko, Emerging Markets Strategist Americas, UBS Financial Services Inc. (UBS FS)
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