Argentina assets plunge as Buenos Aires Province voters rebuke Milei

Argentina’s currency, bonds and stocks plunged after President Javier Milei’s party suffered a landslide defeat in a key provincial election that heightened concern the president lacks the political support needed to sustain his overhaul of the economy.

The government’s dollar bonds posted the biggest declines in emerging markets on Monday, with benchmark notes due in 2035 slumping 6.3 cents on the dollar to 55 cents as of 11.50am local time. Yields soared to just below 13 percent. The official peso plunged as much as seven percent when local markets opened, before paring some of those losses. It was trading at 1,430 per US dollar, within three percent of the upper level of a trading range set by policymakers. The benchmark Merval stock index tumbled nearly 13 percent.

Milei’s party fell well short of investor expectations in Buenos Aires Province on Sunday, trailing the left-leaning Peronist opposition by nearly 14 percentage points with 99 percent of ballots counted. The libertarian leader, in uncharacteristically brief and contrite remarks, acknowledged political mistakes but vowed to press ahead with austerity and free-market policies that have tamed inflation in a country perpetually mired in financial crisis. 

The president’s future will likely hinge on how he corrects course between now and a national midterm vote in October that refreshes nearly half of Congress.

The adverse result for Milei caused Morgan Stanley to close a buy recommendation on Argentine assets started only last week. Investors are now watching to see how much of its limited firepower the government uses up in defending the peso.

“They are willing to lose dollars to avoid a currency crisis, and that’s what I expect them to do in the coming days,” Carolina Schuartzman, director of sales and trading at private lender Banco de Valores, said in a text message. “But we need to watch the dynamics and how long this can last, because losing too many dollars defending the FX will send country risk soaring.”

Investors were already anticipating that a defeat by more than five percentage points would trigger a selloff in the country’s assets, but the extent of the damage was far greater than expected. The US$826-million Global X MSCI Argentina ETF fell more than 10 percent in New York before paring some of those losses, while the local stock slump was the biggest intraday decline since 2020. US-listed shares of firms including Banco Macro SA, Grupo Financiero Galicia and Pampa Energía SA plunged at least 15 percent.

To add to Milei’s woes, fertiliser giant Nutrien Ltd announced an agreement to sell its 50 percent stake in an Argentine nitrogen producer on Monday. While just the last remaining step in the Canadian company’s exit from the South American nation, it highlights the president ability so far to attract substantial foreign capital.

Sunday’s defeat ups the chances of a “downside scenario in which the market questions the likelihood of continued reforms, and uncertainty rises around the future external financing sources,” Morgan Stanley economist Fernando Sedano and strategist Simon Waever said in a report to investors.

Buenos Aires Province, which makes up for almost 40 percent of the national electorate, has historically been a stronghold for Peronism. Although the odds of a victory were slim for Milei’s allies, investors looked to their performance as a way to gauge political sentiment ahead the October 26 national midterms. 

“The resounding defeat of President Javier Milei’s La Libertad Avanza in the Province of Buenos Aires election will likely confirm the worst of market fears and unleash an adverse feedback loop of negative price action, unpleasant policy moves, and more downbeat expectations heading into October’s national mid-terms.”
– Jimena Zuniga, Bloomberg's Latin America geoeconomics analyst

After results were announced, Milei admitted political mistakes and promised “deep self-criticism” to correct them ahead of the October vote. He also vowed to double down on his economic model by continuing the existing foreign-exchange policy and monetary restrictions, as well as other reforms. 

“We had an electoral setback and we have to accept it,” he said.

In recent weeks, the libertarian leader had been struggling to defend the weakening currency by restricting liquidity in the financial sector at the cost of sky-high interest rates. As a last resort, authorities intervened in the exchange market, raising concerns around the government’s dollar holdings. 

Milei was also dealing with the fall-out of a corruption scandal involving his sister, Karina, which bolstered fears around the president’s standing with voters. His government has denied wrongdoing.

With the currency market in turmoil and political risks growing, Argentina’s dollar bonds had already been lagging all emerging-market peers in the past month, delivering losses of 5.5 percent compared to an average gain of two percent for the rest of developing-world debt, according to a Bloomberg index. 

Milei was due to meet with his Cabinet on Monday before markets open in Buenos Aires, according to a Clarín report. Investors will be watching for any corrective measures taken.

“The scale of the defeat far exceeded expectations,” JPMorgan analysts Diego Pereira and Lucila Barbeito wrote in a research note late Sunday. “With nearly 50 days until the national midterm, the peso remains vulnerable to further depreciation, despite Treasury FX intervention.”