Doing the math before the Argentine primaries

1st August 2019

By Ezequiel Zambaglione

Doing the math before the Argentine primaries

Markets are currently pricing a 3-point margin of victory for Alberto Fernández next week, but if the runoff projections for the undecided, Lavagna, and right and left-wing parties are correct, President Mauricio Macri could turn that difference around in the second round.

So what is the math behind those undecided projections, and how would markets react in the different scenarios following the primaries?

</p> <p>Currently, bond prices reflect more than <a href="https://gettheessential.com/economy/2019/07/11/macri-election-favorite-argentina-market-odds-winning-presidential-race">60 percent odds for Macri to win the election</a>, so a 5 to 6 points difference should lead to a price correction in the bond market, to odds near 55 percent. Whereas a tie in the primaries would validate odds above 65 percent, leading to a price rally.</p> <h2><strong>Three big groups of voters</strong></h2> <p>Out of the 33 million people that are authorized to vote, 23.3 million affirmative votes are expected at the primary elections, and 25.75 million in October’s general elections. This implies a 25% and 20% abstention rate respectively, in line with historical election participation rates.</p> <p>These almost 26 million votes are distributed in three parts: <a href="https://gettheessential.com/politics/2019/05/23/who-is-alberto-fernandez">Alberto Fernández</a>’s <em>Frente Todos</em>, Mauricio Macri’s <a href="https://gettheessential.com/politics/2019/06/13/macri-pichetto-vicepresident-argentina-presidential-election"><em>Juntos por el Cambio</em></a> and “the rest,” which include <a href="https://gettheessential.com/politics/2019/03/28/could-roberto-lavagna-be-argentinas-next-president">Roberto Lavagna</a>’s <em>Consenso Federal</em>, the <a href="https://gettheessential.com/politics/2019/06/27/mauricio-macri-jose-luis-espert-alberto-asseff-presidential-race-unir-coalition">right</a> and left-wing parties, as well as the undecided. The undecided group includes people that will vote in August’s primaries but haven’t decided whom for, as well as those expected to cast blank or null votes in the first rounds.</p> <p>Right now, we don’t know exactly how big each of the three groups of voters is, but the question will be answered by the August 11 primary.</p> <p>For now, polls suggest that Fernandez has slightly more core voters than Macri. However, Macri has added (or recovered) a lot of voters to its core over the last months, and is slowly reducing the gap, thanks to FX stability and an increase in people’s confidence in the government. Meanwhile, there is a lot of dispersion among polls regarding the size of the third slice.</p> <img class="wp-image-1681 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/1-300x147.png" alt="Three main groups of voters according to polls: Fernández's core, Macri's core and the rest" width="658" height="322" srcset="https://gettheessential.com/wp-content/uploads/2019/07/1-300x147.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/1-600x295.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/1-768x377.png 768w, https://gettheessential.com/wp-content/uploads/2019/07/1.png 896w" sizes="(max-width: 658px) 100vw, 658px" /> <p>Currently, our estimates are as follows: <em>Frente de Todos</em> seems to have around 9 million core voters,<em> Juntos por el Cambio</em> stands at 8 million, while the rest (Consenso Federal + all other small parties + abstention and blank voting) seem to add up to 8.5 million.</p> <p>If 26 million end up voting by October, more than 11.5 million ballots will be needed to reach 45 percent and a first round win, a target that looks hard to reach at the moment.</p> <p>The key, however, is that voters in the third space are prone to move from their positions at some point. If they move towards Fernández or Macri in October, they could help them win in the first round, while if they move later they could decide the runoff.</p> <h2><strong>First round win still unlikely</strong></h2> <p>For there to be a first-round winner, polarization must appear before the hypothetical runoff, leading the third slice to become smaller, closer to 10 percent. This would imply half the voters of what polls currently project, a significant difference.</p> <p>For this to occur, the undecided should move towards one of the two leading candidates, while Lavagna should also lose half of his voters between now and October.</p> <p>Even though polarization levels are currently <a href="https://www.clarin.com/politica/14-encuestas-enojan-roberto-lavagna_0_R5BhjuR7M.html">significantly high</a>, we do not think they will be enough to allow a first-round victory. There is a significant percentage of electors that reject both Fernández and Macri, and will therefore not decide for one or the other until they are forced to, for example in a second round election or following a large difference in the primaries.</p> <p>On the other hand, the percentage of voters against both majority candidates has dropped from 27 percent to 15 percent since April. If we see this number getting closer to 10 percent, a first round winner would become more likely, but for now it is not the case.</p> <img class="wp-image-1682 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/2-300x200.png" alt="Polls show that polarization has been on the rise over the last few months, with less voters rejecting both leading contenders" width="522" height="348" srcset="https://gettheessential.com/wp-content/uploads/2019/07/2-300x200.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/2-600x399.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/2.png 631w" sizes="(max-width: 522px) 100vw, 522px" /> <h2><strong>Second-Round definition</strong></h2> <p>Whatever size that group ends up being, the third space will be the decider.</p> <p>Polls and past elections suggest that Macri could get between 55 and 65 percent of these votes, although some factors could alter those figures.</p> <p>Between 1 million and 1.5 million voters are expected in the primaries for right and left-wing parties. These parties’ voters will move to Macri and Fernández, respectively, mostly in the runoff. However, historically left-wing voters are more prompt to vote blank, so Macri could have some edge here.</p> <p>We estimate 70 percent of rightwing voters moving to Macri eventually, and 60 percent of left-wing voters moving to Fernández, leading to an edge of 250,000 voters in favor of Macri, i.e. 1 point of positive votes.</p> <p>Undecided and Lavagna voters will also eventually re-distribute between the two main parties. At a total of 6 million (3 voting for Lavagna in the first round and 3 who are yet to decide what to do), this group could be the one to tip the scale.</p> <p>Polls in general reflect that Lavagna voters are slightly skewed towards Macri. According to Isonomía, when you ask Lavagna’s voters who will they vote in a second round between Macri and Alberto, 34 percent would go for Macri and 27 percent for Alberto, while 40 percent haven’t decided yet. As a reference, in 2015, around 65 percent of Massa’s initial voters, which had similar characteristics to current Lavagna voters, ended up with Macri.</p> <img class="wp-image-1683 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/3-300x97.png" alt="How voters of other candidates are likely to move after the first round" width="662" height="214" srcset="https://gettheessential.com/wp-content/uploads/2019/07/3-300x97.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/3-600x194.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/3-768x248.png 768w, https://gettheessential.com/wp-content/uploads/2019/07/3.png 853w" sizes="(max-width: 662px) 100vw, 662px" /> <h2><strong>Scenario 1: A primary with 4 to 6 point difference</strong></h2> <p>If these undecided + Lavagna voters distribute 60 to 40 percent in favor of Macri after the first round, Juntos por el Cambio would gain an additional 4.7 percent of the votes. This, coupled with an extra one percent from the right-wing parties means that Macri could make up for up to a 5 to 6 percentage points defeat in the primaries.</p> <p>Considering that the margin of error of polls is at 2 to 2.5% on average (4 to 5% in a runoff), the election odds after a primary result within this range would be 50 percent for each candidate.</p> <p>Given that bond prices currently reflect more than 60 percent odds for Macri, we believe a range of 4 to 6 point difference in the primaries would be negative for bond prices, as implied probabilities should drop to between 50 and 55 percent for Macri.</p> <p>In contrast, we believe a scenario of 3 point difference for Fernández would be neutral considering current bond prices, unless investors believe that the distribution of undecided voters for the second round is 65 percent for Macri, which would be optimistic in our view.</p> <p>If Macri is 3 points below in the primaries, he would end up 2 to 3 points ahead in a 2nd round according to projections, a figure which is still within the margin of error. Therefore, this scenario in which Fernandez obtains a 3 point difference would imply that probabilities remain around 60 percent for Macri.</p> <img class="wp-image-1686 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/4-300x165.png" alt="Scenario 1: Fernández winning by 4 to 6 points (compared to 3 point baseline margin)" width="633" height="348" srcset="https://gettheessential.com/wp-content/uploads/2019/07/4-300x165.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/4-600x331.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/4.png 662w" sizes="(max-width: 633px) 100vw, 633px" /> <h2><strong>Scenario 2: A tie in the primaries</strong></h2> <p>If the two coalitions are tied after the August 11 vote count, Macri’s winning odds would rise to 70 percent.</p> <p>If both candidates start from an equal base in August in the build up to October and November, Macri could take the lead by adding the previously mentioned 5 to 6 points coming from Lavagna, undecided and right wing voters.</p> <p>Additionally, the positive market dynamic that could be generated by a tie in the primary would probably lead Macri to increase the share of Lavagna + undecided voters, taking 65 percent of that pie compared to Fernández’s 35. Remember that many undecideds don’t want to vote for Macri because of economic reasons, so a positive dynamic in the FX market and an increase in consumer confidence could lead Macri to a higher share of undecided.</p> <p>This would place Juntos por el Cambio above the margin of error, given that Macri would gain 2 million relative votes, which would mean more than 7 percent difference in the second round.</p> <img class="wp-image-1687 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/5-300x171.png" alt="" width="635" height="362" srcset="https://gettheessential.com/wp-content/uploads/2019/07/5-300x171.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/5-600x342.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/5.png 643w" sizes="(max-width: 635px) 100vw, 635px" /> <h2><strong>Scenario 3: Fernández more than 7 points ahead</strong></h2> <p>If the primaries result in more than a 7 point difference for Fernández, Macri’s odds are not good.</p> <p>Even if in this scenario Macri is able to obtain 60 percent of undecided + Lavagna voters in the second round, plus 1 point from the right-wing parties, this would mean 5 to 6 percentage points more only, not enough to make up for a seven point Fernández lead.</p> <p>Frente de Todos would be at 60 percent probability under this scenario: even taking into account the margin of error, Fernández would be at a win.</p> <p>Furthermore, a handicap of 7 points or more in the primaries would lead to a re-pricing of at least 50 percent chance for each candidate, leading to pressure against the peso and an increase in FX volatility, which is the main variable that keeps Macri with possibilities of winning. If FX stability is lost because of market reaction, then it is likely that the share Macri can get from the undecided + Lavagna voters in latter rounds would drop closer to 55 percent. This would make cutting Fernández’s primary lead even more unlikely.</p> <img class="wp-image-1688 aligncenter" src="https://gettheessential.com/wp-content/uploads/2019/07/6-300x168.png" alt="Scenario 3: Alberto winning by 7 or more would turn odds around significantly, making him favorite" width="632" height="354" srcset="https://gettheessential.com/wp-content/uploads/2019/07/6-300x168.png 300w, https://gettheessential.com/wp-content/uploads/2019/07/6-600x337.png 600w, https://gettheessential.com/wp-content/uploads/2019/07/6.png 665w" sizes="(max-width: 632px) 100vw, 632px" /> <p>

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Ezequiel Zambaglione

Ezequiel Zambaglione is the Head of Strategy at Balanz Capital, a leading investment firm in Argentina. He holds a master in Mathematics of Finance from Columbia and worked at Puente and Roubini Global Economics.