Argentina’s Convoluted Christening Ceremony

Argentine stocks, after sloughing off disappointment at MSCI’s unmentioned first-tier return with the frontier index up 35% through July, was again on edge into mid-August primary elections, with former President Christina Fernandez charting a Senate comeback to rally the opposition Peronist party. She retains popularity especially among working class pockets in the capital as the current political base, given the large social spending during her tenure subsequently slowed under the Macri government’s austerity policies. However corruption and money laundering investigations have put her on the defensive, and she roughly tied with the ruling Change coalition candidate in the preliminary race ahead of the October mid-term polls. Foreign investors took her revived visibility in stride as the central bank intervened to support the peso after relative stability following its free float. Recent inflation figures still at 1.5 percent monthly and delays in agricultural export proceeds have pressured the currency, but the monetary authority has tried to maintain high real interest rates through a 25 percent benchmark and Lebac secondary market transactions. The exchange rate has slipped over 10 percent in nominal terms the past few months to 17/dollar with the current account deficit wider at 3 percent of GDP on goods and services imbalances, the latter from increased tourism abroad. Fiscal policy is mostly on target with the primary gap around 4.5 percent of GDP despite election-related outlays and consolidation backlash as unions organize against consumer subsidy and provincial transfer cuts. Should President Macri’s grouping hold its own in the October contest the process will accelerate as sovereign bond holders have begun to insist on further discipline with growth pickup to sustain high-yield participation.

Brazil is also grappling with overdue reforms as President Temer survived an initial impeachment attempt and his cabinet vowed to press on with labor and social security changes. The employment code overhaul will update World War II era practices and ease administrative burdens for small business in particular, while pension adjustment remains uncertain with plans to extend retirement age and conceivably shift to private fund reliance as the current generous scheme is an outsize budget drag. The pro-business PSDB, which backed Temer’s ouster, is a proponent while his PMDB, the largest party in Congress is divided a year from the next scheduled national elections. The government must tread carefully after bad publicity over price and service switches at passport offices and other essential arms to save money. The overall deficit is stuck at 10 percent of GDP and the once sacrosanct primary surplus will not reappear over the near-term. Loosening has moved to the monetary side as the central bank continues to reduce the benchmark Selic, with inflation at a 20-year low of 3 percent on incipient economic recovery. However recession is still deep in Rio de Janeiro state a year after the Summer Olympics there prompting a media blitz of critical retrospectives. A former governor is in jail and major politicians in charge of the event contacts face criminal prosecution, as law and order has worsened since the closing ceremonies. Federal authorities have dispatched 10000 troops to patrol the streets and beaches as the sporting facilities originally designed for productive municipal use lay idle in another form of retirement abuse.