While the world focused on the seemingly unending debt crisis and survival of the Eurozone, political and business risks emerged around the world.
In South Africa, tensions between president Zuma and the African National Congress are set to get worse. Cameroon’s upcoming presidential election poses a business risk because of potential political unrest, and in Argentina president Fernandez is increasing federal spending before October elections.
Argentina’s draft 2012 budget was submitted to Congress on 15 September 2011. The document stipulates that federal spending is to increase by no more than 20% in 2012. Primary spending expanded at a year on year (y/o/y) rate of 35.3% in July 2011, resulting in a significant decline in primary surplus. Increased public spending is largely attributed to capital spending on public works that had risen by 58% y/o/y in July 2011, and President Cristina Fernandez Kirchner’s plans to boost child welfare payments by 23% and raise the minimum wage by 25%.
President Fernandez secured a landslide victory in the presidential primaries with 50% of the vote on 14 August, demonstrating voter support for her unorthodox economic policies. Voters were able to cast ballots across party lines and the nearest rival candidate, Radical Civic Union congressman, Ricardo Alfonsin, trailed 38 percentage points behind.
If voting patterns remain unchanged, President Fernandez will secure the presidency in the first-round of elections and continue to ‘deepen’ her economic policies. This would require President Fernandez to win either 45% of the vote or 40% with a 10-point advantage over the nearest rival candidate.
President Fernandez will face the challenge of encouraging economic growth and improving social welfare whilst trying to rein in public spending. Resources available for populist spending policies however are likely to decline as the global economy weakens and global demand deteriorates. President Fernandez’s administration may therefore be forced to raise further capital by increasing taxes or nationalizing industry, a risk particularly feared by the agricultural sector.
Increased federal spending has also fuelled the rate of inflation, exceeding 20% annually according to private sector estimates. The national statistics agency, Indec, continues to maintain that the rate of annual inflation in 2011 is at 9%, raising concerns that government policies are in line with an invented figure. This lack of transparency over the country’s rate of inflation may limit the attractiveness of the investment climate, and will be a key campaign issue which threatens to compromise President Fernandez’s support.
September polls suggest that President Fernandez is gaining traction and could secure the presidency in the first-round of elections. President Fernandez’s strong approval rating of 60% is attributed to robust economic growth, social welfare programmes and the inability of the opposition to forge alliances to avoid splintering support. A Management and Fit poll conducted between 2 and 6 September gave President Fernandez 51.9% of the vote, trailed by socialist Hermes Binner for the Progressive Front (FAP) with 11.6%, centrist Ricardo Alfonsin for the Radical Civic Union with 7.5%, and dissident Peronist Eduardo Duhalde for the Frente Popular party with 4.5%.
Whilst it is unlikely that any opposition candidate will secure substantial support to challenge Fernandez for the presidency, they will continue to campaign to ensure optimum presence in Congress. Legislative elections, also held on 23 October, will determine the appointment of 24 senators and 130 lower-house legislators. President Fernandez’s administration has been criticised for the decline in the balance of powers, exacerbated by the centralisation of government and increasingly interventionist policies. Opposition candidates fear that the situation would worsen if her Front for Victory Party (FPV) were to achieve the forecasted win of 86 lower-house seats to retain their total of 106 seats.
President Fernandez will continue to push the Kirchner political agenda of centralized political governance and unorthodox economic policy. However, despite widespread public support, she faces a significant challenge in demonstrating her economic model’s longevity in a more challenging global economic environment.
A continuation of the current rate of federal spending may destabilize Argentina’s economy. Argentina’s draft 2012 budget anticipates a significant slowdown for economic growth to 5% from 9% in 2010. This reflects the risk stemming from a potential recession in the US, and of a possible decline in the demand for Argentina’s exports in Brazil and China, due to the uncertainty of the global economy.
The continual decline in Argentina’s primary surplus demonstrates that the rate of government spending is unsustainable. The primary surplus in July 2011 totalled 387m Pesos (US$94m), coming significantly under the central bank’s forecast of 1.75bn Pesos (US$417m). The figure is also a dramatic decline from the same period in 2010, when the primary surplus was reported at 3.9bn Pesos (US$929m). Social spending will significantly cut into the government budget. The proposed elevation of the Universal Child Allowance, for example, which provides child welfare payments, will add 2.2bn Pesos (US$523m) to annual government spending.
In spite of the risks associated with President Fernandez’s economic model, she is unlikely to lower spending. Increased government spending has contributed to strong economic growth and improved social welfare, bolstering support for President Fernandez’s administration. According to government statistics, the rate of unemployment fell to 7.3% in the second quarter of 2011 from 7.4% in the previous quarter, while the poverty rate fell to 8.3% in 2010 from 54% in 2003. President Fernandez has therefore pledged to ‘deepen’ her model, signalling that further spending is likely.
The presidential primaries held in August demonstrated the growing support for President Fernandez and her administration’s unorthodox economic policies. Those traditionally in opposition to President Fernandez’s policies, such as big businesses, have agreed to put an end to confrontations with the government, instead focusing on how to improve the efficiency of the economic model that has received widespread public support.
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