Press

Argentina is in the midst of the most closely contested presidential election since the return of democracy in 1983. It’s also turning out to be one of the most damaging for its economy.

With less than two weeks to go before the country holds an unprecedented second-round runoff to pick Cristina Fernandez de Kirchner’s successor, Argentina’s government is doing everything it can to prop up the currency to give ruling party candidate Daniel Scioli his best shot of defeating Mauricio Macri. That’s pushed foreign-currency reserves to a nine-year low, raising alarms among investors that the administration is putting the long-term health of the economy at risk for short-term political gain.

“The authorities are trying to send messages of macroeconomic stability but this is going to have a significant cost for the next administration,” said Alejo Czerwonko, a strategist at UBS Wealth Management. “It makes the job harder for either of them.”

An additional month of campaigning has led the central bank to add to $4 billion its already spent this year shoring up the peso as the government tries maintain the purchasing power of Argentine voters. And economists say that after subtracting private deposits and loans from China and France, Argentina’s reserves are actually far lower than the official tally of 26.4 billion.

Bond investors have taken notice. Since rallying to 111 cents on the dollar after the first-round election, defaulted government bonds due 2033 have fallen.

The peso has depreciated 11.7 percent this year, less than the 30 percent drop for the Brazilian real.

Fernandez’s administration has slowed the pace of depreciation of the peso, delayed imports and boosted public spending to create a sense of economic well-being to keep the Victory Front alliance in power. The next government will inherit an economy in default on its foreign bonds and a budget deficit projected to be the widest since 1982, according to the Auditor General’s office.

While Scioli beat Macri by three percentage points in the first round, all polls published so far give Macri the advantage in the runoff. Macri had 46.3 percent against 40.2 percent for Scioli in a Management & Fit survey of 2,400 cases carried out Nov. 1-5.

If the first round had produced an outright winner, the victor would already be working on the next government’s agenda, including negotiations with holdout creditors from the 2001 default and policies to attract foreign investment, said Andres Borenstein, an economist at BTG Pactual in Buenos Aires. The next president will be sworn in on Dec. 10.

The extra spending to boost the peso won’t make much difference in the long run, said Miguel Kiguel, director of Buenos Aires-based consultancy EconViews.

Fernandez “wants to leave with the dollar at the lowest possible level so that the problem is everyone else’s, not hers,” he said. “According to her vision, whoever devalues is going against her economic model.”

Fernandez said on Nov. 6 that she can’t ever recall a change of government “with such a positive panorama and growth for the country.”

Jesica Rey, a spokeswoman for the economy ministry, didn’t respond to an e-mail seeking comment about whether the government is spending reserves to aid Scioli’s campaign

The government is also leaking dollars through a system it implemented last year that allows tax paying workers to buy as much as $2,000 per month for savings. Argentines bought a record $703.5 million in October.

As dollars leave the central bank’s coffers, the inflows have dried up. Farmers may be holding on to their harvest in expectation that the new government will reduce export tariffs of as much as 35 percent, said BTG’s Borenstein.

“No one is selling their dollars because exporters have been left out of the market,” Borenstein said. “With both candidates promising to lower tariffs, under what circumstances would an agricultural exporter sell his grains today?”