Argentina investors again braced for a sell-off after Economy Minister Sergio Massa did better than forecast in Sunday’s presidential vote, dashing hopes for an outright win by a more market-friendly candidate.
The country’s dollar bonds — already trading below 30 cents on the dollar — extended their losses on Monday, with five of them including the 2029 note figuring among the worst performers in emerging markets. The peso may weaken on parallel currency markets used to skirt controls on the expectation Argentines will rush into dollars as the government continues spending policies that are seen stoking inflation already running over 130 percent.
Massa surprised pundits Sunday night by taking 37 percent of the vote, forcing a second-round ballot next month with runner-up Javier Milei, the firebrand libertarian outsider who got 30 percent support with 97 percent of votes counted. The biggest question for investors is who backers of third-place candidate Patricia Bullrich migrate to in the November 19 run-off.
Bond prices will fall three to four cents on bets the government will feel empowered to maintain its economic policies for longer, fuelling further inflation and putting more downward pressure on the peso, according to Alejo Costa, the chief strategist for BTG Pactual in Buenos Aires.
“The government will throw everything and the kitchen sink at it ahead of the run-off, extending recent policies,” Costa said. One possibility is trying to win over voters with a fresh round of spending the government can ill afford, he added.
In recent months, Massa has granted welfare checks to workers, bonuses for retirees and tax cuts for 99 percent of the population, the latter of which is expected to cost the government about 0.8 percent of GDP, or about US$3.5 billion at the official exchange rate. That’s all added pressure to an already dire economic situation, with the nation headed for its sixth recession in a decade amid brutal inflation and a currency that’s lost more than 90 percent of its value in the past four years.
Investors had hoped for a stronger showing by Milei or Bullrich, believing either one would pursue a more aggressive economic overhaul as president.
“The market’s preferred outcome would have been strong popular support for Patricia Bullrich and her team of experienced orthodox technocrats,” Graham Stock, senior EM sovereign strategist at RBC Bluebay Asset Management. “Massa and Milei both herald greater uncertainty.”
“Massa’s first-round lead gives him incentive to postpone realigning the official peso rate. A new interest rate hike is a possibility — with few dollars in the reserve coffers, the government may want to raise funding costs to reduce the demand for greenbacks and ease the pressure on parallel markets," said Adriana Dupita, Bloomberg's Argentina and Brazil economist.
Milei won a following with a radical proposal to scrap the peso entirely and use the US dollar as the country’s official currency. The move is seen as high-risk, with some economists warning it could fuel even more inflation. His strong showing in the August primaries caught markets by surprise, with investors rushing to sell the bonds amid concerns about his ability to govern.
“Milei should probably be viewed as a very slight favorite despite failing to gain traction since the primaries,” said Patrick Esteruelas, the head of research for Emso Asset Management. “He should still be the candidate best positioned to capitalise on the enormous discontent with the political establishment and the current economic context.”
Argentina’s peso initially strengthened in cryptocurrency markets Sunday night, gaining as much as 20 percent against a stable coin tied to the dollar after preliminary results were released showing Massa ahead before paring. Investors may have been betting the government would delay a devaluation of the official exchange rate.
by Scott Squires & Giovanna Bellotti Azevedo, Bloomberg