Primary elections, which serve as a barometer for the presidential election, unexpectedly showed that the center-right incumbent Mauricio Macri trailed 15pp behind Alberto Fernández, the Peronist opposition candidate who has recently harshly criticized the deal the IMF struck with the government. This prelude to Macri’s defeat in October’s elections (now the most likely outcome) has heightened the risk of policy discontinuity in times of painful austerity and rebalancing, hence startling investors. The ARS fell as low as 58.8:1 vs. the USD on 14 August, down -30% from a week earlier, before stabilizing around 55.7:1. Along with the spike in yields, this has markedly worsened public debt dynamics and sovereign risk. Thus, the recession is here to stay as the slow H2 recovery will be averted. In addition, a debt default or restructuring seems likely: it would either be required by the IMF as a condition for the last disbursements of the two-year credit line or triggered by the failure to retain IMF support.
