Argentina’s markets recoil after shock primary election results

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Markets in Argentina reeled on Monday after the shock victory of Javier Milei, a radical libertarian economist and outsider candidate, in the country’s primary poll ahead of its presidential election later this year. 

Bonds and equities both swung wildly after Milei won more than 30 per cent of the vote on pledges to dollarise the country’s economy and dramatically cut spending.

The central bank responded quickly by devaluing its official exchange rate by as much as 18 per cent to 350 pesos per dollar to stabilise markets. It also lifted interest rates by 21 percentage points to 118 per cent as it runs out of means to defend its currency. 

Uncertainty created by the shock result, which leaves October’s vote wide open, deepens anxiety among investors around Argentina’s fragile economy. Inflation is running above 115 per cent, foreign exchange reserves are at dangerously low levels and the peso has lost more than half of its value against the dollar over the past 12 months. Four in 10 Argentines are living in poverty.

“The primary election result was a political earthquake,” said Paul Greer emerging markets debt and FX portfolio manager at Fidelity International. “We’ve had a huge injection of uncertainty and the market has repriced to reflect that.”

Prices for Argentina’s most liquid dollar-denominated bonds fell as much as 15 per cent on market opening and ended about 10 per cent lower, trading at between roughly 28 and 34 cents on the dollar.

The benchmark S&P Merval stock index registered initial losses of 3 per cent but closed 3.3 per cent higher. The New York-traded Global X MSCI Argentina ETF — a means for international investors to express views on the country, ended down 2.9 per cent but off a 7 per cent fall soon after the open.

Milei, who came to prominence as a television personality railing against Argentina’s political class, has no executive experience and has spent just two years as a congressional representative.

“There’s concern about the policy themselves, whether he would be able to execute them and also about governability — to what extent he would be able to control protests if he were able to implement his radical measures,” said Peter West, economic adviser at EM-Funding.

The blue-chip swap rate, a free-floating exchange rate for international investors who buy stocks and bonds, weakened by 40 pesos to 637 pesos to the dollar on Monday.

Thierry Larose, emerging markets bond fund manager at Vontobel, said the devaluation of the exchange rate would boost Argentina’s dollar and local bonds as the “massive gap” between the official and unofficial exchange rates have caused a “permanent drain” on foreign exchange reserves.

The board of the IMF is due to meet on August 23 to approve a $7.5bn disbursement to Argentina, provisionally agreed in late July after months of negotiations over the country’s failure to meet crucial program targets. Argentina is the largest debtor to the IMF, after securing a $44bn loan programme last year to refinance a 2018 loan.

“We welcome the authorities’ recent policy actions and commitment going forward to safeguard stability, rebuild reserves and enhance fiscal order,” the IMF said in a statement.

Fernando Marrul, founder of Buenos Aires-based economic consultancy FMyA, said the devaluation of the peso — which the IMF has long called for — is an attempt by the populist government to reassure the fund in a moment of extreme uncertainty. 

“The government can’t afford for that disbursement not to take place,” he said. But he added that the devaluation will have a strong impact on inflation in the run-up to the election. “It will go into the double digits for sure, likely around 15 per cent. That will hit voters’ wallets hard.”

However, investors said that the results had encouraging signs for markets. The two leading parties — with a combined 58 per cent of the vote — on Sunday also both supported slashing fiscal spending and further devaluing the currency. 

Investors said Milei’s victory highlights the likelihood of fragmentation in parliament, after elections in October and a likely run off in November. 

“I think the markets are subject to a two-way pull: up by the fact that the reform oriented blocs together took two-fifths of the vote and down by the uncertainty created by the radical policy platform of Milei which may make it unworkable,” West added.

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