Thursday , November 30 2023

Markets brace for Milei’s ‘chainsaw’ changes after Argentina vote win

Argentina holds second round of presidential election

Argentine president-elect Javier Milei addresses supporters after winning Argentina’s runoff presidential election, in Buenos Aires, Argentina November 19, 2023. REUTERS/Agustin Marcarian Acquire Licensing Rights

BUENOS AIRES/LONDON, Nov 20 (Reuters) – Far-right libertarian Javier Milei’s strong win in Argentina’s presidential election could boost bonds and equities but put downward pressure on the peso currency, investors said on Monday.

The outsider radical, who has pledged to “burn down” the central bank and dollarize the economy, beat Peronist economy chief Sergio Massa in Sunday’s vote, though he struck a measured tone in his first speech as president-elect.

The South American country’s markets are closed on Monday for a local holiday. But its dollar bonds that are issued internationally, and largely trade deep in distressed territory at around 30 cents on the dollar, were largely flat in early trading.

More active trading was expected after U.S. markets open.

JPMorgan’s Diego W. Pereira said in a note to clients late on Sunday that it would not change its recommendation on Argentina’s international bonds from its measured “market weight” stance.

“While we expect the outcome to be constructive for valuations in the immediate term, the lingering uncertainty around Milei’s policy path, execution capabilities and Argentina’s fragile economic stance will still weigh on prices,” Pereira said.

U.S.-listed shares of Argentine companies, including Banco BBVA Argentina, Grupo Financiero Galicia and oil company YPF, gained between 5.4% and 9.6% in early trade.

Milei will not take office until Dec. 10, and investors noted he did not refer to “dollarization” in his first speech, raising questions about how quickly he might pursue scrapping the peso entirely.

He did pledge rapid reforms to fix an economy mired in crisis. Inflation is at 143%, foreign currency reserves are more than $10 billion in the red and a recession is looming. He also signaled moderation and thanked his mainstream conservative backers Mauricio Macri and Patricia Bullrich.

“It is indisputable that a swift change from the failed economic policies of the past is imperative. The accumulated imbalances in the economy have grown too large and must be addressed promptly,” Sergio Armella of Goldman Sachs said in a note.

The peso currency lost ground on crypto exchanges, watched by investors as a proxy for the black market. Bruno Gennari, Argentina expert at KNG Securities, said the peso was trading at around 1,009 versus the dollar on crypto exchanges early on Monday, markedly weaker than the 869 to 975 levels on Friday.

Milei, a TV pundit-turned lawmaker with little political experience, rode a wave of voter anger, at times during the campaign pledging an aggressive “chainsaw” plan to slash state spending and the size of government.

Walter Stoeppelwerth, chief strategist at financial firm Gletir, said Milei needed to stick to his guns, despite some real voter fear about the pain of austerity with two-fifths of the population already in poverty.

“The determining factor is the fiscal commitment. If Milei can convince the market that the chainsaw (fiscal discipline) is the heart and soul of his presidency then bonds rally,” he said. “If he moves toward FX unification that is also a positive. He cannot equivocate.”

Milei will be buoyed by his larger-than-expected vote take of 56% in the run-off after he got 30% in the first round vote last month. But he still faces a divided Congress where his Liberty Advances bloc only has a small share of seats.

“Having a resounding outcome like he did yesterday … gives him a strong public mandate, particularly given his position of weakness in congress,” Jimena Blanco, head of Americas with Verisk Maplecroft, said.

Reporting by Jorgelina do Rosario; Additional reporting by Walter Bianchi, Jorge Otaola and Hernán Nessi; Editing by Christopher Cushing and Andrew Heavens

Our Standards: The Thomson Reuters Trust Principles.

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Jorgelina do Rosario is Emerging Markets Correspondent at Reuters based in London, where she covers finance and economics across developing economies, from fixed income assets and sovereign debt crises to IMF programs. Previously she was an editor and reporter in Bloomberg for over four years based in Buenos Aires, reporting on Argentina’s economy and finance. She holds a Master in Finance from Universidad Torcuato Di Tella.

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