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Fernandez gains presidency, with Kirchner the wild card

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      By Emerging Markets Debt TeamEaton Vance Management

      Boston - The Peronist movement was formally voted back into power in Argentina on Sunday with the election of Alberto Fernandez, who received 48% of the vote, compared with 40% for President Mauricio Macri.

      Fernandez's victory had been widely anticipated following the landslide margin he achieved in the August primary presidential election, but the race tightened substantially since then. This means that Congress will be better balanced between the Peronists and Macri's center-right coalition.

      Some have speculated that the tightening of the race since the summer's primary election reflects second thoughts by a portion of the electorate about returning to the populist policies of former President Cristina Fernandez de Kirchner (CFK). CFK tapped Fernandez (no relation), a relative unknown, to run as president, while she ran as vice president.

      Macri, who is widely viewed as market-friendly, forged a deal with the IMF in 2018 for a record $57 billion loan that involved increased funding in return for accelerated fiscal reform. Despite poor approval ratings prior to the election, both the Macri administration and the central bank have largely stuck with the policy tightening prescribed by the IMF deal.

      Fernandez inherits many obstacles to turning the economy around. Inflation is running at more than 50%, and the country is on the brink of its ninth debt default. (In August, Standard & Poor's Corp. downgraded Argentina's debt to "selective default.") Macri has had to reimpose capital controls, a policy he once rejected, to preserve foreign currency reserves. The reserve drain worsened last week, prompting a further tightening of controls.

      The pressure to dump pesos prompted the start of an offshore market known as a "blue-chip swap" to circumvent the capital controls. The swap allows investors to sell local peso positions at a discount to the official rate. The stricter controls will likely further fuel this market.

      The global income team recently traveled to Argentina, and heard that Fernandez does not want a hard default on the country's obligations. His advisors state that the new president wants a "market-friendly" restructuring.

      However, when we ask about what the specific plans are, the answer does not appear to be consistent with that. Rather than continue the fiscal adjustment as Macri had attempted in conjunction with the IMF, he talks of loosening monetary policy, boosting consumption, implementing price controls to contain inflation and increasing some social subsidy programs.

      Bottom line: Macri's efforts to rebuild the economy's foundation entailed significant hardships - the legacy of failed Peronist policies. It's still unclear how much power CFK will have, but William Faulkner's quote certainly comes to mind: "The past is never dead. It's not even past."