The markets in Argentina were in shock on Monday following the shocking victory of Javier Milei in the primary election, ahead of the presidential elections later this year. Milei is a libertarian radical economist and an outsider candidate.
Bonds and stocks both went wild after Milei’s victory with more than 30% of the vote. He had promised to dollarize the economy and drastically cut spending.
To stabilise the markets, the central bank devalued its official exchange rate up to 18% to 350 pesos for every dollar. The central bank also increased interest rates by 21 percent points to 118 percent as it ran out of ways to defend its currency.
Investors are increasingly concerned about Argentina’s fragile economic situation due to the uncertainty created by the shocking result. The inflation rate is above 115%, the foreign exchange reserves have fallen to dangerously low levels, and the peso’s value has dropped by more than half against the dollar in the last 12 months. Four out of ten Argentines live in poverty.
Paul Greer, emerging markets debt manager and FX portfolio manger at Fidelity said that the primary election results were a political earthquake. The market has repricing to reflect the uncertainty that we’ve experienced.
The price of Argentina’s most liquid dollar denominated bonds dropped as much as 15% at the opening of the market and finished about 10% lower. Trading between 28 and 34 cents per dollar. The benchmark S&P Merval index initially lost 3 percent but ended 3.3 percent higher. Global X MSCI Argentina ETF, a New York-traded ETF that allows international investors to voice their opinions on Argentina, closed down 2.9 percent but after a 7 percent fall shortly after the opening.
Milei is a TV personality who has become famous for her criticism of Argentina’s political elite. She has no experience in executive positions and spent only two years working as a congress representative.
Peter West, an economic advisor at EM Funding, said that there were concerns about the policies themselves, about whether he could execute them, and about his governability – to what extent he might be able control protests if he was able implement his radical actions.
Blue-chip swap rates, which are free-floating exchange rates for foreign investors buying stocks and bonds, fell by 40 pesos on Monday to 637 pesos per dollar.
Thierry Larose is the emerging markets bond fund manager for Vontobel. He said that the devaluation would boost Argentina’s local and dollar bonds, as the “massive” gap between the official exchange rate and the unofficial rate has caused a permanent drain on foreign exchange reserves.
IMF board is scheduled to meet on 23 August to approve the disbursement of $7.5bn to Argentina. The amount was agreed to provisionally in late July, after months of negotiation over Argentina’s failures to meet key program targets. Argentina is the IMF’s largest debtor after it secured a $44bn refinancing loan last year.
The IMF released a statement saying that it “welcomes the recent policy decisions and the commitment to continue safeguarding stability, building reserves and enhancing fiscal order”.
Fernando Marrul is the founder of FMyA in Buenos Aires, an economic consultancy. He said that the IMF had long called for the devaluation, but the government was trying to reassure it at a time of great uncertainty.
He said that the government could not afford to have this disbursement delayed. He added, however, that devaluation would have a significant impact on inflation leading up to the elections. “It’ll be in the double digits, probably around 15%.” This will have a big impact on the wallets of voters.”
Investors, however, said that the results showed encouraging signs for the markets. Both the two major parties, which received a combined total of 58 percent of the votes on Sunday, supported further devaluation and reducing fiscal spending.
Investors believe that Milei’s win highlights the possibility of fragmentation within parliament after elections in October, and possibly a run-off in November.
West said: “I believe the markets are being pulled in two directions. Up by the fact the reform-oriented blocs took together two-fifths and down by uncertainty created by Milei’s radical policy platform which may make it impossible to implement.”