Argentina Devalues Peso, Hikes Rates in Bid to Curb Market Chaos After Milei Upset
Argentina is raising interest rates and depreciating its currency as assets experienced a rapid decline on Monday following the unexpected strong backing of a populist candidate who promised to bring down the central bank.
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Argentina's election has been turned upside down by outsider candidate Milei, who emerged victorious in the primary.
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The authorities acted quickly to decrease the value of the official exchange rate by approximately 18%, bringing it to around 350 pesos per dollar. Additionally, they raised the key interest rate by a significant 21 percentage points, reaching 118%. This drastic change in policy is a result of the government's dwindling funds to protect their currency. As a consequence, the peso experienced a decline of up to 14% in unofficial markets, reaching a new all-time low. Moreover, the country's already troubled debt faced further decreases in comparison to other developing markets. Stocks also took a hit, with a US-traded ETF experiencing its most significant drop since March 2020 at one point.
The decline occurred following Javier Milei's utilization of voter frustration, which propelled him to the leading position in the primary election held on Sunday, obtaining roughly one-third of the votes. The lawmaker identifies himself as a proponent of libertarianism and advocates for the adoption of the dollar as the currency in the economy.
Check it out: Milei, an outsider, shakes up Argentina's election by winning the primary.
Milei's economic message appeals to investors, yet they have concerns about the implementation and potential risks associated with institutional aspects. This is mainly due to his limited influence in congress and his assertive manner, as expressed by Alejo Costa, the primary strategist for Argentina at BTG Pactual in Buenos Aires.
The congressman who served for only one term rallied against a group of politicians whom he claimed had mishandled the economy for an extended period. As a result, the nation has been experiencing a series of crises one after another. Argentina is on the verge of facing its sixth recession in the last decade and struggling with skyrocketing inflation, which has exceeded 100%. Milei proposes a solution to control the surge in prices by abandoning the peso and adopting the US dollar instead. However, numerous economists argue that this action would lead to financial chaos.
However, while mainstream economists find themselves puzzled by the limited information disclosed by Milei regarding his plans, Argentines who are eager to pave a different path don't appear overly concerned about his intentions to "destroy" the central bank. The audience erupts with applause as he describes politicians as individuals who are involved in unlawful activities, theft, and destructive actions that have led to the downfall of the economy.
Argentina's opposition coalition on the center-right secured the second position on Sunday night, garnering approximately 28% of the vote. Meanwhile, the ruling party leaning towards the left trailed closely behind with nearly 27% of the vote, with almost 90% of the ballots counted.
"The clear message is that the vote, driven by frustration and a desire to hold the political elites accountable, has been successful," expressed Fernando Losada, a managing director at Oppenheimer & Co., based in New York.
Similar to Jair Bolsonaro in Brazil and Donald Trump in the US, who are considered outsider populists, Milei also holds controversial views on social issues. He has expressed his intention to abolish the recently established Women's Ministry and a state organization aimed at combating racism. Furthermore, he aims to impose stricter regulations on abortion and simplify the process of purchasing firearms in a country where such weapons are not commonly found in households.
Experts in politics have suggested that his inspiring opinions on societal matters could pose a challenge in building alliances and successfully implementing his plans.
According to Patrick Esteruelas, the head of research at Emso Asset Management in Miami, the general market sentiment is anticipated to be pessimistic due to the uncertainties surrounding Milei and the disappointing performance of the main conservative coalition, Juntos por el Cambio. As a result, this uncertainty may continue for a while, potentially leading to a sudden and sharp decline in sales.
Investors can expect to gain a more comprehensive understanding of the candidates' economic plans in the upcoming weeks. Argentina is set to hold its presidential election on October 22, with a potential runoff on November 19 if needed. In order to avoid a second round, the leading candidate must secure 45% of valid votes in the initial round, or alternatively, obtain 40% of the votes while maintaining a 10 percentage-point margin over the runner-up. A decisive triumph would also bolster the winning party's performance in the congress.
Javier Casabal, a financial expert at Adcap Securities in Buenos Aires, believes that Milei's outstanding performance makes it improbable for any candidate to achieve the necessary threshold for a clear victory in October.
“At present, Milei symbolizes a state of unpredictability,” Casabal remarked. "A majority of voters are improbable to defect from their existing alliances, at least in large proportions, therefore the most plausible scenario would involve a second round of voting in November."
Regardless of the victor in the highest position, the new government will be faced with an immense challenge of soothing an inflation rate that has reached three digits. Moreover, they will need to replenish the central bank's reserves, which have declined to the lowest level in 17 years, by attracting more US currency.
Discover More: Argentina's Key Assets to Observe Ahead of Crucial Primary Election
According to Claudia Calich, the chief of emerging-market debt at M&G Investments, the primary duty of the upcoming administration will involve unraveling unviable policies.
"That's going to be extremely important because there's an extensive array of tasks the incoming administration, regardless of who it may be, will have to accomplish," she expressed.
--With the help of Carolina Wilson, Netty Ismail and Vinícius Andrade.
(Updates market prices throughout. A preceding rendition of this article rectified the interest rate mentioned in the second paragraph.)
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