Buried underneath the headlines trumpeting the lopsided electoral defeat suffered by President Javier Milei’s party this weekend was a development potentially even more troubling for investors in Argentina: the re-emergence of Axel Kicillof.
If Milei is a darling of Wall Street, well, then Kicillof is his nemesis. Whereas Milei is obsessed with slashing the budget deficit, tearing down regulations and taming inflation, Kicillof – now the governor of Buenos Aires Province – is remembered on Wall Street as a former minister who intervened in the economy, defaulted on sovereign debt and meddled in private business decisions.
After stepping down from the outgoing leftist government of Cristina Fernández de Kirchner in 2015, Kicillof, a once rising political star, slowly faded from the presidential conversation – until Sunday night.
After the Kicillof-led Peronists crushed Milei’s party in the provincial race by nearly 14 percentage points, Argentine bonds plunged as much as 10 percent in early Monday trading, shares of local banks tanked and the official peso slid four percent. Argentina’s sovereign risk shot above 1,100 basis points before paring back a bit, up from 906 on Friday, according to data compiled by JPMorgan.
“Kicillof Risk” is surfacing amid economic and financial fragility in Argentina. Milei’s administration is struggling to pass key bills in Congress to cut the country’s budget deficit, while a corruption scandal erodes confidence in a government that ran an anti-graft campaign.
At the same time, Fernández de Kirchner’s house arrest and lifetime ban from public office provides Kicillof with an opening to take the reins of the Peronist movement that’s seen its leadership splinter the past two years.
Milei and Kicillof, are, in some ways, cut from the same cloth. They’re outspoken, flamboyant showmen who like to dominate the headlines. Both economists are partial to the Elvis look: thick sideburns that extend beneath the ears.
Yet Milei’s disappointing result and Kicillof’s emergence as the Kirchnerite frontrunner signal “a steeper climb for the administration” heading into October’s national midterms, JPMorgan economists Diego Pereira and Lucila Barbeito said in a report to investors. “A prolonged period of heightened political risk premia is likely to weigh on economic activity” as a result, they added.
“Milei has vowed to correct political missteps, but has shown little inclination to shift gears thus far. A new political decision-making group announced Monday underwhelmed. It includes Milei’s sister Karina – his right hand in the government, now under scrutiny amid a corruption scandal – and Martín Menem, a lawmaker linked to the political strategy that ended with Sunday’s fiasco,” said Bloomberg’s Jimena Zuniga, geoeconomics analyst, and Adriana Dupita, deputy chief emerging markets economist.
The October 26 national midterm vote will determine Milei’s representation in Congress, a key factor for the president as he works to push through structural reforms on pensions and labour. Sunday’s result led analysts and investors to revise their forecasts and expectations, including a potential Peronist return to power.
During Kicillof’s tenure as economy minister, Argentina was censured by the International Monetary Fund for faking economic data. He also defaulted on sovereign bonds, tightened currency controls and expanded price freezes. By contrast, Milei has lifted many currency controls that he inherited from Kicillof’s allies, as well as ditching price freezes and meeting all bond payments to investors.
Kicillof infamously led the 2012 expropriation of oil giant YPF SA, which led to a US$16-billion lawsuit the nation is still fighting in US courts.
“Foreign investors are clearly building a scenario in which Kicillof runs for president, and they don’t feel comfortable with his interventionist approach,” said Juan Carlos Barboza, head of research at Banco Mariva. “He doesn’t create an attractive environment for investments, without leaning on imbalances such as the fiscal deficit and inflation.”
Kicillof’s comeback as a contender limits how much Argentina’s sovereign risk – the premium of interest compared to benchmark US Treasury notes – can fall in the near term, Barboza said.
Even though Kicillof’s ties with Kirchner have cooled, Sergio Massa, who ran against Milei for the presidency in 2023, congratulated the governor after the vote, broadening his support in Peronist ranks.
“Axel was the clear winner: all his political allies lined up to kiss his hand, like in the movie The Godfather, on Sunday night,” said Fernando Marull, partner at consulting firm FM&A. “An Axel economic plan would mean lower asset values, higher country risk, a wider FX gap, more money printing and larger fiscal deficits.”
Milei’s government faces a minefield of challenges at a time when it needs to regain access to global markets to cover more than US$4 billion in liabilities coming due in January.
“Absent a highly unlikely turnaround in expectations, regaining market access for the rollover of January’s debt payments will be very difficult,” Juan Solá, head of Latin America strategy at BancTrust & Co, said in a report to investors.
To be sure, the 2027 vote is still a long way off, and Milei has less than seven weeks left to try to influence voter sentiment in his favour.
For investors who lived through Argentina’s last election-driven market meltdown in 2019, former Central Bank governor Guido Sandleris sees key differences today, such as Milei’s fiscal balance. Fewer foreign investors in peso-denominated instruments also means “less fuel for a run on the currency,” according to Sandleris.
“Kirchnerism’s triumph Sunday doesn’t at all imply a consecration of its return,” said Sandleris, a professor at Johns Hopkins SAIS and Universidad Torcuato di Tella in Buenos Aires. “Milei’s government has two more years left and so many things can still happen.”
by Ignacio Olivera Doll, Bloomberg
