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OPINION AND ANALYSIS | 10-08-2019 11:53

What if a bomb flies in Hormuz?

At the end of the day, pretty much any exogenous shock could throw everything in Argentina into disarray.

It is quite difficult trying to explain the inner workings of Argentina from a socio-political and economic standpoint to anyone, even more so to ourselves sometimes. Every country has its issues – much like every person or couple – yet Argentina’s tragicomedy appears compounded by its structural conditions for wealth, which feed a juxtaposition of consistent yearning for greatness coupled with eternal disappointment. With the PASO primaries upon us, the frenzy of information produced by both candidates and media outlets, pumped out and accelerated through social media, has saturated the population to the point where the edges of reality have been blurred out. What is true has become less important than which side one feels emotionally attached to, and while economic plans are lightly thrown around as a magic solution to nearly a century of downward mediocrity, the electorate has no real idea where each candidate actually stands from a policy standpoint. Even worse, the whole process is being called into question, as the opposition argues that a technology firm founded by Venezuelan engineers, Smartmatic, doesn’t guarantee the basic conditions of safety and traceability necessary for such an important electoral contest, while the Mauricio Macri administration simply argues the system is “better than the one used by the previous administration.”

Yet, as has been mentioned in these pages before, the PASO primaries — which could spark a deadly market spiral on Monday — are a sort of figment of our imagination that has become so real that it conditions our free will. Designed to operate as primaries, they will instead serve as a live drill election that will set the stage for the coming months, ahead of the real thing. Hedge funds that manage to pick out the right investment strategy, and whatever candidate delivers a surprise outcome, are the only ones with anything real to gain from this mess. The rest of Argentina will face the short-term consequences of the preliminary figures, and then have to support another two-and-a-half months of campaigning until October, and a potential final 30 days ahead of the ballotage. Non-stop anxiety all the way to November.

And then what? Several intertwined factors need to be taken into account. First of all, the result will have a direct impact on financial markets, which in turn could either perpetuate the current pax cambiaria, generate an appreciation in the value of the peso, or pull the carpet from under the Central Bank’s feet, meaning financial chaos. Either of those situations could last all the way to October, only to give way to one of the two remaining scenarios, or they could prove short-lived in the immediate, giving way to one of the alternative scenarios. And the same thing could happen immediately after November if in turn there were a run-off.

Whoever makes it to the Casa Rosada will face a tough situation. Polarisation means a coalition government, which is in turn fragile. Whether Mauricio Macri goes for a second term or Alberto Fernández opens a beachhead for Cristina Fernández de Kirchner’s return to the major leagues of Argentine power, the country’s structural issues will remain unchanged. Regardless of the short-term reaction of the market, we have no clear idea how any candidate plans to tackle the poverty trap that is particularly nefarious in Buenos Aires Province, revamp the educational system to create the skills for tomorrow’s labour market, or deal with the Kafkaesque conditions that businesses face, making Argentina truly uncompetitive.

There are a few known-unknowns. Argentina’s debt burden has risen dangerously during the Macri years, and it hasn’t helped in solving the issues just mentioned, and so many others. Whoever finds himself running the country in 2022 will face US$46 billion in debt servicing tied to the International Monetary Fund, equal to five percent of GDP, journalist Marcelo Zlotogwiazda explained. Add to that bonds held by private investors and the value doubles, reaching 10 percent of GDP and making it impossible to pay. A debt restructuring is on its way. A default seems extremely unlikely, meaning Argentina’s fate will be tied to the IMF for the foreseeable future.

Also at stake is the future of the Vaca Muerta formation, which has started to show its real potential in oil and gas and has already changed Argentina’s energy situation. Vaca Muerta will help Argentina replace energy imports, saving much needed dollars, and it could even lead to exports to other South American nations. Its potential is such that Argentina could become a leading global exporter of natural gas, but that requires that the energy industry and the government generate the conditions for long-term investment so that in three to four years the infrastructure is in place for Vaca Muerta to be competitive with the Marcellus Shale in Pennsylvania, for example.

Another known-unknown is the fragility of Argentina’s socio-economic stability. At the end of the day, pretty much any exogenous shock could throw everything into disarray. Bombs in Hormuz, either as Great Britain tries to assert itself in the postBrexit world, or as a result of provocations from Israel or Donald Trump. Kim Jong-Un, feeling threatened, attacking South Korea. China’s response to US tariffs throwing the global economy into recession. Argentina is sort of like a satire of the famous metaphor for chaos theory: an actual butterfly flapping its wings could make the whole structure fold in on itself, concrete columns and all.

While the PASO elections are nothing but a farce that contributes to post-modern hysteria, reading between the lines we can hopefully begin to see a brighter future ahead. For that, whoever wins will need to do things differently from what they themselves have done in the past. They will also need a lot of luck. Break a leg!

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Agustino Fontevecchia

Agustino Fontevecchia

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