Analysis-Argentina investors see silver lining in Milei election shock

By Rodrigo Campos

NEW YORK (Reuters) – Investors in Argentina’s financial markets, where bonds and the peso slid on Monday after central bank moves following a surprise primary election result, said the vote had a silver lining: it would likely hasten long-called-for economic reforms.

The Sunday primary, an open vote that acts as a dress rehearsal for the October general election, handed a big win to right-wing populist Javier Milei, who wants to dollarize the economy and axe the central bank, while the nomination for the conservative coalition was won by hardline Patricia Bullrich.

The result initially introduced uncertainty into asset pricing, with traders selling stocks and dollar bonds – but prices later stabilized and the local stock market closed over 3% higher.

Both Bullrich and Milei have pledged a sharp shock economic cure for the country which has inflation of 116%, an interest rate even higher, negative net foreign currency reserves and a maze of capital controls to protect the plunging peso.

“The surprisingly strong showing for far-right … suggests that there is popular appetite for a shock-therapy style approach to deal with the economy’s problems,” said Capital Economics Emerging Markets Economist Kimberley Sperrfechter in a note.

She cautioned though that the tight race for the Oct. 22 presidential election could in the short-term cause more economic disturbance as Sergio Massa, the ruling Peronist coalition candidate and current economy minister, looked to make up ground.

The Sunday election marked a rebuke to the left-leaning Peronists, Argentina’s main political force for decades. Their populist wing around powerful Vice President Cristina Fernandez de Kirchner has long been skeptical of big business and is a fan of generous welfare spending – and is little loved by financial markets.

Investors said this would outweigh any worries about Milei, despite some of his heterodox pledges, including to axe the central bank and dollarize the economy.

“The end to Kirchnerism is a more powerful driver than fears of Milei’s governability,” said Walter Stoeppelwerth, chief strategist at brokerage Gletir SA, adding Argentina looked like a “good place to add risk.”

Milei faces a significant challenge still to turn the primary election win into a successful run to the presidency. Even if he wins, he would face opposition from a likely divided Congress.

“The PASO (primary) tends to be a rejection vote and the actual vote may be different,” said Shamaila Khan, head of fixed income for Emerging Markets and Asia Pacific at UBS Asset Management. “We do believe all election outcomes will lead to better policy-making.”

Nonetheless, on Monday dollar-denominated bonds fell as much as four points, with the 2030 trading just over 31 cents on the dollar. The post-2020 restructuring bonds in dollars are yielding between 19% and 37% at current prices.

The government responded by devaluing the peso, a long-suggested move that the government had been against. The official peso fell near 18% to 350 per dollar, still far from popular parallel rates that brushed 700. The central bank also increased the benchmark interest rate to 118% from 97%.

The local Argentine stock market benchmark bucked the trend to end at a fresh record high despite a big drop at the open, though the MSCI index of Argentine stocks, traded in dollars, fell more than 3%.

The country’s voters seem to have given their backing for tougher measures to improve the economic malaise, but implementing those may not be easy, especially if austerity measures stoke anger on the streets.

“The range of potential outcomes is wide, however the bar is low for an enhanced policy outlook,” said T. Rowe Price portfolio manager Samy Muaddi. “That said, given economic and institutional scarring, it would be a Herculean task to put Argentina on a path to market access even in the most optimistic scenario.”