FACTBOX-Key political risks to watch in Argentina

BUENOS AIRES, March 2 Wed Mar 2, 2011 10:11am EST

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BUENOS AIRES, March 2 (Reuters) - Simmering political tensions could ruffle Argentine financial markets over the coming months as President Cristina Fernandez and her rivals lock horns ahead of October's presidential election.

As Latin America's No. 3 economy booms, the center-leftist Fernandez leads polls and is widely expected to seek re-election following the death last year of her powerful husband and predecessor as president, Nestor Kirchner.

While Fernandez keeps voters and allies guessing about whether she will run, numerous opposition candidates are trying to stitch up alliances strong enough to chip away at her formidable poll lead. [ID:nN01291216]

Kirchner's death sent Argentine bond and stock prices higher as investors bet the couple's time in power was coming to an end, clearing the way for a more business-friendly government to be elected in 2011. [ID:nN29175687]

But Fernandez's healthy poll ratings and signs she is moving to the left by stepping up pressure on the private sector and distancing herself from centrist allies could weigh on asset prices as voting nears.

Economists say high international grains prices and brisk demand from neighboring Brazil are cushioning the Argentine economy, but that double-digit inflation is becoming entrenched -- leaving a tricky legacy for the next government.

Here are some of the main issues investors are watching:

ELECTION BUILD-UP

Polls conducted after Kirchner's death on Oct. 27 have suggested Fernandez would win in a first round, especially because no single, strong opposition candidate has emerged.

However, Fernandez's approval rating has since dipped to as low as 40 percent, according to pollsters Management & Fit, and she might be reluctant to announce her candidacy unless she can stabilize that level of support.

Under Argentina's electoral system, candidates can win in a first round with 40 percent of the vote as long as the second-placed candidate trails by at least 10 points. Support of 45 percent guarantees a first-round victory.

That level of backing in polls would also make it easier for her to secure the loyalty of notoriously fickle Peronist party bigwigs who control the vote-winning machinery -- especially in the densely-populated outskirts of the capital.

But Fernandez appears instead to be trying to strengthen her backing outside the Peronist party, forging links with non-Peronist center-leftists and shunning Daniel Scioli, the moderate governor of Buenos Aires province.

Scioli is seen as sympathetic to business interests, so Fernandez's apparent move to distance herself from him could cement investors' concerns.

What to watch for:

-- Fernandez's poll ratings and any signs of waning support that could discourage her from standing.

-- Improved poll ratings could encourage her to further distance herself from centrist Peronists.

-- Signs of opposition challengers making significant headway in polls. [ID:nN07284521]

POST-KIRCHNER POLICY

After some initial signs she might be more pragmatic following the death of her combative husband, Fernandez has increased pressure on the private sector in recent weeks -- ordering businesses to cap prices and pressuring economists over their independent inflation forecasts. [ID:nN10179577]

Several minor cabinet changes, such as the appointment of Nilda Garre as security minister and Juan Manuel Abal Medina as media secretary, suggest Fernandez wants to promote progressive leftists. Conversely, Cabinet Chief Anibal Fernandez and Interior Minister Florencio Randazzo have lost influence.

Fernandez is said to be taking increasing note of the advice of leading members of the La Campora youth group, set up by the Kirchners' son Maximo.

What to watch for:

-- Signs of hardening on economic policy, such as increased export curbs to stem inflation and import restrictions aimed at protecting the trade surplus.

-- Following recent abolition of ONCCA farm trade agency, any other surprise moves that could let Fernandez further tighten control over key economic sectors. [ID:nN25281636]

SPENDING AND FINANCES

Social spending is accelerating fast, highlighting Fernandez's decision to prioritize economic growth despite surging annual inflation ARCPI=ECI, estimated by analysts to be running at about 25 percent. [ID:nN12194801]

She has announced increases to pensions and child welfare benefits, measures that could help bolster her support among the poor and assure die-hard Kirchner followers she is respecting her husband's legacy.

By signing a decree to tap another $7.5 billion from central bank reserves to repay private creditors, Fernandez will be able to maintain spending, which has been growing by about 40 percent year-on-year in recent months.

Economists say loose fiscal and monetary policies make rising prices ever harder to contain, raising the appeal of imports due to the nominally stable exchange rate ARSB=, eroding purchasing power and fueling pay demands.

What to watch:

-- Any loosening of central bank monetary supply growth targets. [ID:nN26213826]

-- Paris Club debt negotiations. Markets rallied when Fernandez announced talks to repay defaulted debt, seen as a vital step if Argentina is to tap credit markets for the first time in nine years, but progress has lagged. [ID:nLDE71N1XW]

STRIKES, SOCIAL UNREST

Farm leaders have threatened to resume strike protests if the government does not lift export curbs on wheat and corn. [ID:nN25281636]

They were skeptical over Fernandez's decision to scrap the ONCCA export agency, but any strikes are likely to be short and symbolic with a limited impact on global grains prices.

Surging inflation is, however, fanning wage demands across industries, and could aggravate social tensions and strikes, putting Fernandez under pressure as she seeks to pacify union leaders.

Violence between squatters and local residents late last year, partly blamed on soaring rents in the slums, was a reminder of how quickly unrest can escalate. [ID:nN20136978]

What to watch:

-- Involvement of pro-government trade unions in strikes or protests, which might strain Fernandez's ties with the country's most powerful union leader, Hugo Moyano.

-- Any perceived upswing in social unrest or crime, which the opposition could use to attack the government. (Editing by Kieran Murray)

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