Argentine investors, overwhelmed by politics, fear the future

Once again, the Argentine investors flee after being surprised by the political complexity of the country.

The assets fell on Monday after Sergio Massa, the Minister of Economy turned presidential candidate, achieved a surprising comeback in the first electoral round. After a terrible performance in the August primaries, this Sunday he obtained approximately 37% of the votes, which forces a second round against Javier Mileithe incendiary libertarian who achieved around 30% support with almost all of the votes counted.

The country’s dollar bonds — which trade between 20 and 26 cents on the dollar — were the worst performer in emerging markets on Monday. Papers fell across the curve, with securities maturing in 2030 down more than 3 cents, the biggest decline since July 2022. An exchange-traded fund that tracks Argentine stocks plummeted as much as 5.1%, the most intraday drop since Milei’s surprise victory in the primaries.

Ballottage Massa-Milei: why the economic strategy addressed by each candidate will be key

The massive sell-off occurs while Investors are preparing for a second round that they consider the worst possible scenario for the country’s battered assets. On the one hand, there is Massa, who accelerated spending ahead of the elections, adding pressure to an economy that is heading for its sixth recession in a decade, with negative net reserves and without access to global capital markets. On the other is Milei, an outsider with little political support whose main plan for the country risks further fueling a inflation that already reaches 138%.

For Alejo Costa, chief strategist at BTG Pactual in Buenos Aires, bonds could fall further due to bets that the Government will feel empowered to maintain its economic policies for longer, fueling inflation and putting more downward pressure on the weight.

According to Costa, the Government will go all-in before the second round, expanding recent policies. One possibility is try to win over voters with a new round of spending that the government cannot affordhe added.

In recent months, Massa has delivered social aid to workers, bonuses to retirees and tax cuts for 99% of the population, the latter at an estimated cost of 0.8% of GDP, or about US$3.5 billion. at the official exchange rate.

Sergio Massa.

Kimberley Sperrfechter, Latin America economist at Capital Economics, said the economy minister and presidential candidate is likely to increase what she called “pre-election tax gifts” before the second round, which will increase the country’s vulnerabilities and make an eventual economic adjustment “even more painful” and, potentially, more disorderly.

“Whoever reaches the Casa Rosada will face the difficult task of pulling the Argentine economy back from the brink, something that will be challenging even for a more market-friendly Administration,” he said.

In addition to the additional spending that will likely occur before the Nov. 19 runoff, investors will also look to evaluate where Patricia Bullrich’s supporters migrate, candidate who came in third place. Markets expected Milei or Bullrich to do better, believing either would carry out more aggressive economic reform as president.

“He The market’s preferred outcome would have been strong popular support for Patricia Bullrich and his team of experienced orthodox technocrats,” said Graham Stock, senior sovereign emerging markets strategist at RBC Bluebay Asset Management. “Both Massa and Milei portend greater uncertainty.”

Post-election markets: the CCL dollar fell, bonds were punctured and country risk rose

The result of Sunday’s vote points to a very open race. Some analysts see Massa as the favorite, highlighting his ability to obtain support: Massa obtained almost 3 million more votes than in the August primaries, compared to nearly 500,000 for Milei.

“He Milei’s confrontational style did not help add new votes since the PASO elections earlier this year. This suggests a slight bias towards Massa,” Dirk Willer, head of global macro and emerging markets strategy at Citigroup, wrote in a note.

Dollarization

Milei won supporters with a radical proposal to use the US dollar as the country’s official currency, completely eliminating the peso, the world’s worst-performing currency, which he says “no one wants.” For years, Argentina has restricted daily movements of the peso in an attempt to control rising consumer prices, a strategy that has spawned a dozen different exchange rates, all largely disconnected from the official rate.

The move is considered high risk and some economists warn it could further fuel inflation. His strong showing in the August primary took markets by surprise, and investors rushed to sell bonds amid concerns about his ability to govern.

“Milei should probably be seen as a slight favorite despite failing to gain traction since the primaries,” said Patrick Esteruelas, head of research at Emso Asset Management. “She should remain the candidate best positioned to capitalize on the enormous discontent with traditional politics and the current economic context.”

Bunker Javier Milei
Javier Milei.

What Bloomberg Economics says

“Massa’s advantage in the first round gives him incentives to postpone the readjustment of the official weight rate. A further rise in interest rates is a possibility: with few dollars in reserve coffers, the Government may want to increase financing costs to reduce demand for greenbacks and relieve pressure on parallel markets.

—Adriana Dupita, economist for Argentina and Brazil

Massa’s return prevented speculation that the government would devalue the peso immediately after Sunday’s elections, like what it did after the primaries, when it let the local currency fall 18% just before the opening of operations. Pressure on peso futures, which had been building over the past few weeks, is falling sharply, strengthening to 670 from 790 in late December contracts.

“While the result suggests that markets will reduce the likelihood of further exchange rate depreciation in the coming days, all other measures will likely worsen, worsening an already difficult situation,” Morgan Stanley analysts led by Fernando wrote in a note. Sedano. “We expect bonds to reach recent lows again.”

Translated by Paulina Munita.

ED

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