Argentina: Libertarian Milei favored to win Sun. but likely needs runoff that could be even

• Polls have Milei ahead, but he is not close to avoiding a runoff
• Milei has 50%-55% chance of becoming Argentina's first political outsider president
• FPV's Massa has 20% chance to win despite leading a failed government
• We see Let's Change's Bullrich as having 30% chance to win, qualifying for runoff is hardest part

The 2023 general election is headlined by a presidential election in which three very different candidates have a chance to win. The election will decide who oversees policy decisions in a country that teeters on the verge of hyperinflation, yet another external debt default, and an economic crisis of a degree usually reserved for countries at war. Just a few months ago, the approaching presidential election was a positive driver for local assets due to the likelihood that Argentina would elect a normal government to end with another four years of destructive FPV populism. These expectations were completely upended by the results of the August presidential primaries.

The frontrunner for the election is the anti-establishment libertarian Javier Milei of the Freedom Advances Party (LLA), who campaigned on the promise of dollarization, flushing the political class down the toilet, and using a chainsaw to slash public spending and downsize the state. Milei appears likely to face current Economy Minister and virtual president Sergio Massa of the catch-all populist Front for Victory (FPV) in an eventual runoff in November. Let's Change's Patricia Bullrich, the market's preferred candidate, has a smaller but real chance to finish in the top two and qualify for a runoff.

The election is hard to forecast because the primary round showed margins are close, Milei is a unique candidate that could generate an unprecedented degree of voter backlash, and Massa is overseeing an economy that is blowing up. The consensus, informed by the results of the August primaries, unreliable polls, and the press, is that Milei has a relatively safe lead for the Oct 22 election and a decent chance to win outright in the first round, that a prospective runoff between Milei and Massa would be very close, and that Bullrich will suffer due to the increasing polarization of the election. We don't trust the polls as much and place more weight on the primaries, so we are inclined to believe that the election will be more closely contested between the three.

WHAT'S AT STAKE

In the Oct 22 general election Argentineans will vote for president, half of the seats in the Chamber of Deputies, a third of the seats in the Senate, and some local elections. The presidential election deservedly gets nearly all of the attention because Argentina's political system borders on hyper presidentialism. Moreover, the Congress election is highly likely to end with the FPV and Let's Change holding big minorities and LLA with a distant third minority, and there is almost no possibility of a different scenario.

The presidential election goes to a runoff in November if the October winner doesn't get to 45% or to 40% with a 10pps gap over second.

THE CANDIDATES

Javier Milei - Freedom Advances (LLA)

How Milei got here: The core of Milei's presidential campaign promises can be summed up in three points: 1) Dollarization as the best and only option to reduce inflation and stabilize the economy, 2) aggressive spending cuts and broad deregulation to liberate the potential of a private sector that has been oppressed by a corrupt and inefficient public sector, and 3) strong opposition to a corrupt political class that has shown to only care about their own benefit while causing big detriment to the rest of the country. Milei's proposals and rhetoric proved effective in convincing a broad and varied share of the population. Analysis of voter behavior during the primaries suggests that the libertarian's support was much more evenly distributed across ages and income levels than the support for the FPV (young and poor) and Let's Change (Old and middle income).

Milei's core proposals gave him a higher floor than anyone expected (the 32% of the total votes he obtained in the wide August primaries), but the question of his ceiling is THE question of the election. Milei has electability problems on three accounts: 1) he has very conservative or backward views on social topics like abortion, women's rights, minority's rights, gun carrying, and climate change that don't match with the majority view in Argentina, 2) his anti-state views raise fears that he would eliminate the right to free education and free healthcare, which are two highly valued institutions for Argentineans, and 3) Milei is too irrational and erratic to be president.

The above would make Milei unelectable in most scenarios, but he is the favorite in this election because his most likely runoff opponent is the current captain of a depressing and quickly sinking ship. Even though Milei doesn't hide his controversial views on social topics, he is not actively advocating for reforms to the status quo either.

Some challenges in a Milei government: Milei's stabilization plan has three core components: an aggressive fiscal consolidation with both spending cuts and tax cuts, dollarization, and the reduction or elimination of regulations on labor and external trade. We've seen nothing to suggest that there is a concrete plan to achieve these objectives yet, except maybe for the dollarization plan, to an extent. The fiscal consolidation would be achieved through the privatization of most state companies, slashing subsidies on energy and public transportation, reducing the number of ministries, and shifting the full burden of investment on infrastructure to the private sector.

On dollarization, the main problem is that the only path to achieving it for a country that has negative net FX reserves, a big monetary overhang, and no access to FX financing is a sharp devaluation with a sizable overshooting that would increase inflation and poverty from the current dangerous levels. Milei's team believes there is a path to a more painless dollarization by tapping high-risk lenders for short-term borrowing while collateralizing future FX inflows (such as from exports and new FX bonds), which doesn't sound like a good or workable plan to us.

Milei could have severe governability problems given that his party would have too small of a Congress presence and almost non-existent influence over the pressure groups that often destabilize non-Peronist governments. The low Congress numbers would be a problem the minute the opposition decides to start overturning the executive orders Milei will use to pass most laws. Milei would also be in danger of a legal impeachment if his attempt to stabilize the economy fails. The libertarian's lack of influence over pressure groups means that massive protests by the groups affected by his policies are bound to become commonplace.

Our view on Milei: We believe Milei has a 50%-55% chance of becoming the next president and are bearish on what his presidency would mean for the country's economic prospects. The probability of Milei becoming the president that finally sets Argentina on the road to macroeconomic stabilization is very low because he doesn't seem to have a good stabilization plan or a good team working with him. We see a high probability that he gets swallowed by the economic crisis and his personal flaws well before finishing his term.

Sergio Massa - Front for Victory (FPV)

Massa is the unquestioned leader of a government that failed on all accounts, but he still has a chance to win the election because the main opposition coalition committed political suicide by lining up behind a terrible candidate and the eventual runoff could be against an erratic radical who doesn't inspire any confidence on centrist or non-political voters. Massa's campaign over the last week has been basically "vote for the normal guy". The primaries and governor elections showed that support for the FPV is at an all-time low, but that may not matter in a runoff where the other option is a jump into the unknown hand in hand with someone like Milei.

What a Massa government would look like: We believe a Massa presidency would be just like what we have been seeing over the past year, but under much more challenging economic circumstances due to the scorched earth Economy Minister Sergio Massa is leaving to future president Sergio Massa. We have a 16-year track record of FPV governments that were all pretty much the same, including this last year with Massa as the de-facto president, so we don't see why anyone would expect something different. An external debt default and inflation rising higher seem inevitable under Massa, and the main question is if there would be a tipping point with hyperinflation or property right violations that forces a change.

Our view on Massa: We believe Massa has a 20% chance of becoming the next president and we are as bearish as one can be on what his presidency would mean for Argentina's long-term future. Some analysts and commentators seem to believe Massa would transform the FPV from radical populists into a more market-oriented and normal center-left coalition, but this view seems informed purely by Massa's cunning words and not his actions, so we disagree completely. We see Massa as the most dangerous type of politician: an extremely shrewd and power-hungry political animal who knows exactly what levers to pull to gain influence over pressure groups (the media, picketers, and labor unions), but also has all the wrong instincts on economics and an extreme degree of short-sightedness. In short, Massa is the perfect successor to ex-president Cristina Kirchner, but potentially more dangerous because he would be taking over a much weaker economy. If Massa gets elected, we see a decent chance that a sinking economy leads to Massa and the FPV leaning a lot more into their latent anti-democratic impulses to maintain control of the country and deflect blame. The probability of Argentina becoming a failed country like Venezuela under Maduro would be minimal, but we believe Massa is still likely to do incommensurable damage.

Patricia Bullrich - Let's Change

Bullrich is an unpopular politician not well suited for president who campaigned as a dollar-store Milei through the primaries. After having burned bridges with centrist voters to win the Let's Change primary, she found herself in Milei's shadow and with no easy way to get out of it. Bullrich's road to winning is for Argentineans to see she is a more moderate and serious version of Milei, but polls suggest it's too late. Bullrich would be favored to win a runoff if she gets in.

Bullrich offers the best chance of stabilizing the economy while minimizing the pain that is coming in 2024 because she is the only candidate with a good team of professionals behind her. Her team knows it is essential to provide a detailed stabilization plan with a strong fiscal anchor, monetary reform, and deregulation. Bullrich advisers have gone back and forth on how quickly they would float the currency, but we would bet on them on making this a priority to work towards fast.

Our view on Bullrich: We believe Bullrich has a 30% chance to get to the runoff and a 25%-30% chance of winning the election. Bullrich getting to the runoff while not sitting too far behind 1st place is the best-case scenario and markets would react positively. However, we believe the probability of Bullrich having a successful government that stabilizes the economy and prevents the return of the FPV to power in four years is less than 50%. Even in good scenarios, the next couple of years should be difficult for the economy and full of social conflict, and Bullrich doesn't have the charisma, the power, and the strategic intelligence needed to go through that period while preserving political support.

OPINION POLLS

Polls in Argentina don't have a good track record and our recommendation is to give them less weight than in an average EM country. Most pollsters are individual ventures that conduct low-quality surveys and there is evidence of herding. Pollsters often miss the mark by big margins in presidential elections, for example seeing Milei third in the August primaries and missing his vote share by about 13pps. Pollsters did pick up that Milei was a serious candidate before there was any other evidence, but none came close to adequately sizing his potential.

INTERPRETING THE ELECTION RESULTS

Interpreting results in the heat of the moment can oftentimes lead us astray, so here are a few key questions and points that can help frame the outcome. These represent our views of the election, which on some points can differ from the consensus view:

1) Does Milei grow?

The big question of the election is whether Milei's ceiling is high enough for him to win, so it will be important to see whether he grows in this election from the primaries. Milei had 31.6% of the affirmative votes in the primary. If he is not above 33.0% on Sunday, we can start seriously doubting his ability to attract new voters to the degree necessary to win in a runoff. If Milei is above 35% and the rest are in line with the polls, Milei would be in a very good position to win.

2) Milei + Bullrich = ?

It is very hard for us to imagine Massa winning a prospective runoff if Milei and Bullrich combine for 60% of the votes as the polls are saying. Even in a scenario where Massa wins the first round by a 2pps-3pps at 35% and Milei struggles to get above 32%, we would lean toward backing Milei to win the runoff if Milei + Bullrich = 60%.

3) How does Massa become the favorite?

Massa becomes the favorite in our view if he wins by +5pps. The only exception is Massa winning by 3pps-4pps while Milei falls to 30% and still qualifies over Bullrich. The local consensus could shift to Massa as the favorite if he wins by any margin.

4) How does Bullrich become the favorite?

If Bullrich gets second place and the distance with whoever ends first is less than 5pps, she should be considered the favorite for the runoff in our view.

ELECTION DAY AND WHAT COMES NEXT

Voting stations will be open on Sunday until 18:00 local time (UTC -3). There will be no exit polls and the first partial tally should be released around 22:00 [an earlier release is possible but it would be very surprising]. If the election is closely contested, we may have no clarity on the outcome until close to midnight. Partial results tend to overestimate the performance of the opposition vis-à-vis the FPV because the votes of the province of Buenos Aires, usually a key FPV stronghold, take longer to be counted. A projection of seats for Congress should be available before midnight, but it's reliability will depend on how contested the races are.

The presidential election is likely headed to a runoff on Nov 19. Winning outright on Sunday requires that the winner either gets to 45% or gets to 40% and opens up a +10pps margin over the candidate in second place.