Even more of the same from Cristina

By Daniel Kerner

It's been a busy few weeks in Latin America, with citizens scurrying to the polls in Guatemala, Nicaragua, and Argentina. In Guatemala and Nicaragua, the elections left some uncertainty. Will former army general Otto Perez Molina's tough rhetoric translate into meaningful change in Guatemala, especially where crime and taxation are concerned? And with rampant electoral fraud alleged in Nicaragua, will the United States and the European Union recognize incumbent Daniel Ortega's nearly 32-point win? There are fewer questions in Argentina, where Cristina Fernandez de Kirchner's reelection promises more of the same-and possibly even more of it, if she tries to tweak the constitution to give herself a shot at a third term.

Despite Argentina's staggeringly high inflation (around 25 percent, according to private estimates), worsening fiscal position (spending is up 35 percent so far this year), declining trade surplus (imports have grown 37 percent year-to-date, while exports have gained only 28 percent), and steady capital flight (around $3 billion a month for the past few months), Fernandez de Kirchner swept the Oct. 23 elections. Macroeconomic imbalances notwithstanding, GDP continues to expand, unemployment is low, and wages have kept up with inflation. And this, together with expansive social policies, has improved voters' well-being. Now backed by nearly 54 percent of the vote, as well as comfortable majorities in both the lower house and the senate, Fernandez de Kirchner has little incentive to steer economic policy in a more orthodox direction-including, say, less expansionary fiscal and monetary policies to contain inflation or easing restrictions on foreign trade-especially as Argentine authorities watch the US and Europe struggle under just such a framework.  

The government's moves since the elections support this more-of-the-same outlook. Three days after Fernandez de Kirchner's win, her administration decreed that it would force energy and mining companies to repatriate all of their export revenue (previously, they'd been allowed to keep 70 percent and 100 percent of it abroad). This about-face was likely an attempt to reduce downward pressure on the currency, a result of the deteriorating trade balance and rising demand for dollars. The government also limited access to foreign currency to stem capital flight. The central bank has already spent more than $4 billion of its reserves trying to prop the peso up, and while the administration is loath to let the currency fall, it's likely to keep proffering ad hoc fixes like forcing companies to repatriate revenue or imposing foreign exchange controls rather than making any serious adjustments. Likewise, while the government announced earlier this month that it would reduce subsidies to the energy and transportation sectors, thereby curtailing spending, the proposed $140 million reduction is miniscule compared with the roughly $17 billion that the government spends on subsidies. And most of that $17 billion will probably come in the form of higher taxes rather than higher energy prices (which would stimulate investment).  So no game changer there.

As a result, Argentina's economic distortions are unlikely to improve much, and could worsen if the world economy languishes further. Fernandez de Kirchner will have to be careful, though. Her popularity depends in part on the country's economic conditions, and her chance of securing a third term depends on her popularity. She'll need support from two-thirds of both chambers to make the necessary constitutional adjustment -- a challenge, but not an impossibility. It remains to be seen whether she'll test the waters this year. 

Daniel Kerner is an analyst in Eurasia Group's Latin America practice.