Friday, December 1, 2023

ECONOMY | 23-10-2023 20:40

Massa-Milei run-off in Argentina is worst-case scenario for bonds

A round-up of commentary about what the Argentina's election, the outcome of the vote and what it means for the markets.

Wall Street is bracing for more losses on Argentina’s sovereign bonds after Sunday’s presidential ballot sent the contest to a second round between Economy Minister Sergio Massa and libertarian outsider Javier Milei — the scenario that investors had feared most.

Massa, part of the ruling Peronist government, surprised pundits by taking roughly 37 percent of the vote, according to a nearly complete tally. That will force a head-to-head match-up next month with Milei, who got close to 30 percent after gaining attention with a plan to dollarise the economy. Centre-right candidate Patricia Bullrich came in third. The results mark a reversal of fortunes for Massa, whose coalition came in third in August primaries.

The country’s overseas notes were among the world’s worst performers Monday, with most falling two to three cents and benchmark securities due in 2035 dropping below 25 cents on the dollar. Analysts say there’s more pain ahead.

Here’s a round-up of commentary about what the vote’s outcome means for markets:

Malcolm Dorson, Global X Management Company

  • “The market most likely won’t like the polarised set up, given the executive seat will now fall to one of the two extreme candidates.”
  • “If Milei wins, he won’t have the support in the Senate or Lower House to pass his extreme proposals.”
  • “That said, despite the gridlock for extreme measures, Milei wants to cut spending and we would see an opportunity for the country to shift toward economic orthodoxy.”

Ramiro Blazquez, BancTrust & Co.

  • “Massa was able to capitalise on the massive fiscal expansion in the run-up to the election. Relative to the previous run-off scenario, Massa is now better positioned because he obtained 6ppt ahead of what polls were predicting. Still, Milei still has a strong chance of winning in the second round if he is able to” establish himself as an alternative to Kirchnerism and win endorsements from like-minded politicians.
  • “With Milei now less certain to win, the policy uncertainty is larger because a Massa Presidency would be at first conditioned by Kirchnerism. This increases the chances of a disorderly restructuring, so we look to protracted bond price weakness in the next four weeks.”
  • “If Massa wins, the path of bond prices will depend on the message he spreads and also on the governability outlook. Nevertheless, it looks like Kirchnerism will retain a relatively large influence in the short term, so at least that in the start of a Massa administration, the scope for reforms looks limited.”

Lucila Bonilla, EM economist at Oxford Economics

  • “We expect the sell-off of Argentine assets, particularly credit, will intensify. But our view on probabilities of default and recovery scenarios over one to two years would largely stand after the initial panic phase, regardless of the outcome of the elections.”

Javier Casabal, Adcap Asset Management

  • “The market was hoping for a confirmation of a regime change, and these results suggest quite the opposite. However, these results also reduce much of the uncertainty created by Milei’s lack of a cohesive team and concerns about his ability to build consensus.”
  • “We believe that all the assets that had risen in pesos due to the risk of dollarisation” — such as dollar futures, dollar-linked bonds and stocks — will likely decline.

Dirk Willer, Citigroup

  • “Both candidates will be competitive in the second round, but with a slight advantage for Massa. Bullrich and Milei have already signalled a potential electoral cooperation, but she will only transfer a part of her votes to Milei.”
  • “Milei’s confrontational style did not help in bringing new votes since the PASO elections earlier this year. This suggests a slight bias toward Massa.”

Roger Horn, Mariva Capital Markets

  • “The market was hoping that centre-right Patricia Bullrich would have made it to the second round, but Argentina does need some new direction. Waiting on rains for soybeans and a pipeline to be completed can’t be the country’s only path to salvation.”

Kimberley Sperrfechter, Latin America economist at Capital Economics

  • “The run-up to the second-round vote in November is likely to see further pre-election fiscal giveaways. But these will come at the expense of a further build-up of macroeconomic vulnerabilities and means that the eventual economic adjustment will be even more painful and, potentially, more disorderly.”
  • “Whoever next resides in Casa Rosada will face the tall order of pulling Argentina’s economy back from the brink – something even a more market-friendly administration will find challenging. And with inflation set to rise to close to 200 percent over the coming months, the economy headed for steep recession and balance of payments strains acute, the next president has no room for error.”

Jeff Grills, Aegon Asset Management

  • “Markets are surprised and disappointed with the results as they are seen as a continuation of the policies which have brought Argentina to where it is now.”

by Giovanna Bellotti Azevedo, Leda Alvim & Kevin Simauchi, Bloomberg


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