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Markets fell in Argentina on Monday after the surprise victory of Javier Milli, a radical libertarian economist and outsider candidate, in the country’s primaries ahead of the presidential election later this year.
Bonds and stocks alike swung after Milei won more than 30 percent of the vote on its pledges to dollarize the country’s economy and cut spending sharply.
The central bank responded quickly by lowering the official exchange rate by as much as 18 percent to 350 pesos per dollar to stabilize the markets. It also raised interest rates by 21 percentage points to 118 percent as it ran out of resources to defend its currency.
Uncertainty caused by the shock outcome, which leaves the October vote wide open, deepens anxiety among investors about Argentina’s fragile economy. Inflation is running at over 115 percent, foreign exchange reserves are at dangerously low levels, and the peso has lost more than half its value against the dollar over the past 12 months. Four out of every 10 Argentines live in poverty.
“The initial outcome of the election was a political earthquake,” said Paul Greer, director of emerging markets debt and foreign exchange portfolio at Fidelity International. “We’ve been given a massive injection of uncertainty and the market has reset prices to reflect that.”
Prices for Argentina’s most liquid dollar-denominated bonds were down as much as 15 percent when the market opened, and down about 10 percent, trading between roughly 28 and 34 cents on the dollar.
The benchmark S&P Merval posted initial losses of 3 per cent but closed up 3.3 per cent. The New York-traded Global X MSCI Argentina ETF — a way for international investors to express their views on the country — finished down 2.9 percent but from a 7 percent decline shortly after the opening.
Mellie, who rose to prominence as a TV personality against Argentina’s political class, has no executive experience and has only spent two years as a congressional representative.
said Peter West, economic advisor at EM – Finance.
The premium swap rate, a free-floating exchange rate for international investors who buy stocks and bonds, doubled by 40 pesos to 637 pesos to the dollar on Monday.
The exchange rate cut will boost Argentine dollar and local bonds because the “massive gap” between official and unofficial exchange rates has caused a “permanent drain” of foreign exchange reserves, said Thierry Larousse, director of an emerging market bond fund at Vontobel.
The International Monetary Fund’s board is set to meet on Aug. 23 to approve a $7.5 billion disbursement for Argentina, which was tentatively agreed in late July after months of negotiations over the country’s failure to meet crucial program targets. Argentina is the largest debtor to the International Monetary Fund, having secured a $44 billion loan program last year to refinance the 2018 loan.
“We welcome the authorities’ recent policy actions and their commitment to move forward to protect stability, rebuild reserves and strengthen the financial system,” the IMF said in a statement.
Fernando Marol, founder of Buenos Aires-based FMyA economic consultancy, said the devaluation of the peso — long demanded by the IMF — is an attempt by the populist government to reassure the fund at a moment of great uncertainty.
“The government cannot afford this exchange,” he said. But he added that currency devaluation would have a strong impact on inflation in the run-up to the election. “It’s going to go into double digits for sure, probably around 15 percent. That’s going to hurt voters’ wallets very hard.”
However, investors said the results had encouraging signs for the markets. The two major parties – with a total of 58 percent of the vote – also on Sunday backed fiscal spending cuts and further currency devaluation.
Investors said the militia’s victory highlighted the possibility of a split in parliament after the October elections, with elections likely to be held in November.
“I think the markets are undergoing a two-way pull: up by the fact that the reform-oriented blocs together got two-fifths of the vote and down by the uncertainty created by Milli’s radical policy platform that might make it unworkable,” West added.
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