Cristina's challenges

From the Economist Intelligence Unit ViewsWire - The Economist

Winning the election in Argentina will only be the start

Cristina Fernández de Kirchner, wife of Argentina’s current president, is certain to be elected to succeed her husband, probably in a first-round vote on October 28th. She will achieve this with ease—thanks to Néstor Kirchner’s popularity and a weak and fragmented opposition—and without laying out a detailed policy platform. However, she will not be able to evade the host of challenges that await her, including an overheating economy, rapidly accelerating inflation, energy shortages and lingering social tensions.

To win in the first round, Mrs Kirchner, of the centre-left Frente para la Victoria (FV), will need to garner either 45% of the vote or 40% with a ten-percentage-point margin over her nearest rival. During the week prior to the election, several opinion polls have indicated that she will reach this threshold. She has maintained a significant lead over the other candidates throughout the campaign, and this has enabled her to give only sketchy suggestions of her policy priorities, and to spend much of the campaign period travelling abroad.

More of the same?

Her husband, Mr Kirchner, has pursued a series of interventionist and stimulative economic policies—such as strong fiscal spending, price accords and a weak currency—to help boost the recovery from the economic crisis and financial collapse of 2001-02. While Chinese-style growth of more than 8% in the last four years and a slashing of unemployment have underpinned his popularity, his administration has not been without its setbacks. These include a loss for political allies in several recent local elections (including in the contest for the federal district), corruption scandals, renewed power cuts, and social unrest in the provinces and in the capital.

Concerns about transparency and the independence of institutions have also been raised, given Mr Kirchner's tendency to concentrate power in the presidency (which his wife is expected to continue). These concerns have grown since early this year, when the government intervened in the national statistics institute. Authorities are believed to have “fixed” inflation data so that they appear more favourable than the real figures (largely by altering the composition of the consumer price index) in the run-up to the election. According to official statistics, annual inflation was at 8.6% in September; according to independent estimates, it is actually running at closer to 15-20%.

Opposition candidates have latched on to the inflation problem, and it has become a key election theme. There also have been a number of protests and boycotts over rising food prices in recent weeks. But in the face of robust economic growth, Mrs Kirchner's own high popularity has not been dented, and her electoral prospects are secure. A more testing time may come after the election, when she will face the challenge of reining in inflation and engineering a soft landing for the economy.

Incompatible policies

Mrs Kirchner's plans for the next administration remain vague. She has been notably absent on the campaign trail in Argentina, focusing instead on visiting foreign leaders and business investors in the region and in the US in recent months. Mrs Kirchner has said only that she will aim to forge a social pact between government, business and unions; will revisit how inflation is measured (to rebuild confidence in official data); and may gradually raise utility rates. By speaking at investors forums abroad, she has also raised expectations that she might address the issue of holdout creditors who did not participate in Argentina’s massive 2002 debt restructuring.

However, specifics probably will only come after inauguration day, December 10th, and the selection of her cabinet. Since she lacks administrative and executive experience of her own, her choices will be revealing of her likely policies, and should indicate whether they will amount to changes of substance, or only of style.

Argentina’s current policy goals are largely incompatible: maintaining strong economic growth, holding on to the twin (fiscal and current-account) surpluses, keeping inflation at single-digit levels, maintaining a weak currency and minimising rises in interest rates. Changes will be needed if Argentina is to avoid a hard landing for the economy in the medium term. But this could prove tricky.

Efforts will have to be made to tame inflation while also eliminating price distortions and easing price controls that have discouraged investment in areas such as energy and utilities. Fiscal spending should also be reduced to prevent an erosion of public finances, and private investment encouraged to fill the gap as economic growth slows.

Seen as more of a negotiator, Mrs Kirchner might find it easier to make such adjustments and adopt other unpopular measures than her husband (although he may well announce some of these measures during the transition period to cushion the impact on his wife's popularity). But does she have the will?

The Economist Intelligence Unit’s baseline forecast assumes that a moderate adjustment in macroeconomic policy, including some tightening of monetary policy, will be made soon after the election, and will ensure a relatively smooth transition. But this is far from assured. And if the problems—particularly inflation—worsen, Mrs Kirchner’s current popularity and fresh image may quickly wear away.