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ECONOMY | 09-12-2023 08:47

Argentina rally put to test as challenges await Milei

Investors’ giddiness with Argentina will be put to the test as Javier Milei takes over on Sunday.

Investors’ giddiness with Argentina will be put to the test as Javier Milei takes over on Sunday, kicking off a presidential term riddled with challenges as he tries to bring the nation's economy back from the brink. 

Some of the country’s dollar bonds, which trade at deeply distressed levels, have rallied to their highest levels in two years. The benchmark stock index, to which foreign investors have little access because of currency controls, soared more than 45 percent since his November 19 win. 

The libertarian’s decision to pack his economic team with Wall Street veterans has eased concerns for money managers, who worried about his more radical proposals of shutting down the Central Bank and replacing the local currency with the US dollar when he emerged as the leading candidate back in August. But while assets have jumped, investors warn that Milei’s first months in office are unlikely to be a smooth ride. 

“Milei and team have to cross the Sahara desert with a half a bottle of mineral water; they have to do whatever is possible to send a transparent, coherent message to markets,” said Walter Stoeppelwerth, a senior strategist at Montevideo-based brokerage Gletir. “It will be a rocky four months of implementation — if they are able to engender trust, credibility, that goes a long way.”

Notes due in 2030 jumped roughly nine cents to around 40 cents on the dollar since Milei’s victory last month, while the US$100 million Global X MSCI Argentina exchange-traded fund that tracks the country’s stocks is on track to see three straight weeks of inflows totalling at least US$31.6 million.  

“The perception of markets, their constructiveness, has been improving due to the moderation that Milei has shown since winning,” said Mauro Roca, managing director for emerging markets at The TCW Group in Los Angeles.

Milei tapped ex-investment bankers Luis Caputo and Santiago Bausili to lead the Economy Ministry and Central Bank, respectively. The nominations broaden the powers of the economic team to implement austerity measures and fight inflation. It also signals the new government isn’t planning to have an independent monetary authority for now. 



Caputo and Bausili will have to rework Argentina’s broken exchange rate regime propped up by capital controls and import restrictions that’s hampered business activity and restricted investment. While Milei railed against the peso on the campaign trail, pledging to scrap it for the dollar, his team has since signaled the change won’t be imminent, and that currency controls are unlikely to be lifted right away. 

Still, a devaluation of the peso is seen as inevitable. The government let it slide by a little more than five percent on Thursday, and market pricing signalled traders expect a steeper drop next week. Investment banks and local brokerages suggest a devaluation of some 44 percent.

On the last business day of President Alberto Fernández’s administration — Friday is a holiday in Argentina — the Central Bank put a limit on the amount of foreign currency commercial banks can hold to discourage hoarding of US dollars ahead of an expected devaluation.


Liquidity rush

Banks, meanwhile, continue to shore up liquidity, ditching notes due in 28 days, or Leliqs, for one-day repos. On Thursday, they rolled over just 1.5 percent of the 1.15 trillion pesos in Leliqs auctioned, the lowest amount on record for the second time in a row, and compares with a rate of above 100 percent before the November 19 election.

If lenders continue to flee Leliqs, which are used by monetary authorities to absorb pesos, it potentially could unleash more money supply into the economy and stoke inflation already running at 143 percent a year. 

“The market has reacted positively so far, although the real test will come over the next few months,” said Fernando Losada, managing director at Oppenheimer & Co. “He will have to show that his policies can be implemented without social unrest, in a context of high inflation, stagnant economic activity and scarce foreign financing.”

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by Kevin Simauchi, Bloomberg


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