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A man walks past a political poster of Argentina's Economy Minister and presidential candidate for Union por la Patria party, Sergio Massa, in Ezeiza, Buenos Aires province on Nov. 15.LUIS ROBAYO/AFP/Getty Images

Global investors expect a large amount of financial pain out of Argentina no matter who voters pick on Sunday as their next president, with social unrest as top of mind as a much-needed fiscal adjustment will likely trigger even more inflation.

Economy minister Sergio Massa and populist outsider Javier Milei go head-to-head in the Nov. 19 presidential election run-off, a choice between sticking with the current Peronist government or a sharp swerve to a right-wing libertarian.

The winning candidate, who would take office on Dec. 10, would need to fix an economy with inflation of 143%, a messy array of capital controls, a looming recession and net foreign currency reserves JPMorgan pegs at minus $15.3 billion.

“There is no room left to muddle through with the current economic policy stance, and the incoming president will have to take a turn in economic policy,” Barclays’ Latam economist Pilar Tavella said in a Wednesday note.

“How sharp of a turn will depend on a combination of their commitment to reform and the political muscle to execute it.”

Milei’s shock therapy approach includes scrapping the central bank and dollarizing the economy, while Massa’s proposal is one of more gradual change though trimming the fiscal deficit and spurring more exports to rebuild reserves.

Argentina had agreed to cut its primary fiscal deficit to 1.9% of GDP this year to comply with a $44 billion International Monetary Fund (IMF) program that has helped keep the lights on as the agricultural exporter faced a debilitating drought.

The deficit is set to be much wider, with Itau pinning it at 3% of GDP by year-end. The IMF has internally hardened its view on the program and could get tougher on disbursements, meaning the next $3 billion is no longer a given.

“The most likely scenario is that we see both parties sitting down with a clean sheet of paper and redesigning the program,” said Alejo Czerwonko, CIO for Emerging Markets Americas at UBS Global Wealth Management.

“The existing framework and agreement are damaged beyond repair so a change in government offers everybody the opportunity to come up with a new plan.”

The economy is likely already in recession and is expected to contract again next year. Inflation is seen hitting 185% by the end of 2023, following last year’s near 100%.

A part of the blame goes to policies that encouraged money printing at the central bank, which the Peronist coalition in power has - successfully so far - used to boost Massa’s chances of winning the presidency.

Shortly after being sworn in as economy minister, Massa in August 2022 pledged to stop printing money to fight inflation.

“When a person who did something fiscally irresponsible tells you ‘Once I am elected I will be fiscally responsible’ I think it is reasonable to doubt,” said Carlos de Sousa, emerging markets debt strategist at Vontobel Asset Management.

“Markets will likely prefer a Milei victory simply because he is more credible on delivering the fiscal adjustment.”

Continuing to dismantle energy subsidies, which totaled $12 billion last year, will be high in the agenda.

Investors also agree that the Argentine peso is over-valued, meaning a devaluation is likely in the cards. The official exchange is around 350 pesos per dollar while the black market one is nearly 1,000.

But a devaluation would trigger a further spike in inflation, which hits the poor the hardest. With 2-in-5 already under the poverty line in Argentina, there is concern that if the number grows much higher the streets will flood with protesters and social unrest will explode.

UBS sees the official exchange rate ending 2023 at 550, then jumping to 1,350 pesos by end-2024 and 1,900 by end-2025.

Social unrest “is a risk that remains top of mind for most,” said UBS’s Czerwonko. “Every investor understands that the macroeconomic adjustments that Argentina needs will inevitably translate into short-term pain.”

For investors, Argentine stocks traded in New York have been a beacon of hope, up near 15% year to date. But that comes after a near 50% YTD gain four months ago, and the underperformance is expected to continue regardless of who wins, according to JPMorgan’s Diego Celedon.

“Regardless of the outcome, Argentine equities will face a challenging scenario that should prevent the market from outperforming,” Celedon wrote in a client note.

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