Argentina devalues its currency and raises interest rates after surprise primary election.
As pressure mounted on Argentina’s financial markets after a primary election, the government devalued the peso by about 18% on Monday and raised the benchmark interest rate by 21 percentage points to 118%, the central bank said.
Markets were betting on more moderate candidates in a vote that serves as a practice run for the general election in two months.
According to the central bank, until the October elections, the official FX rate will remain at 350 pesos to 1 dollar. In early trade, the parallel informal peso fell 10% to a record low of 670 to the dollar.
According to William Jackson, chief emerging markets economist at Capital Economics, “steps to devalue the currency will help bring it closer to fair value.”
But the peso will not be allowed to depreciate gradually (as has been the policy so far), but will instead be held steady until the election, when the currency will quickly become significantly overvalued once again.
Dollar-denominated international bonds lost some of their recent gains and foreign investors dumped Argentine stocks, with the Global X MSCI Argentina ETF ( ARGT.P ) falling 4% in U.S. trading. The regional S&P Merval Index (.MERV) earlier fell as much as 3.5% and closed the day unchanged.
October’s presidential race was upended by far-right libertarian Congressman Javier Millay, who wants to abolish the central bank and dollarize the economy. Milei beat projections with 30% of the vote, the largest after more than 97% of the votes were counted.
The 2038 note led to declines in the nation’s sovereign dollar bonds, which were down 2 cents against the dollar, according to MarketAxess data.
At 1402 GMT, the 2041 bond was at 31 cents on the dollar, while the 2046 bond was at 29.7 cents.
Investment firm JP Morgan advised investors to maintain a “market weight” position on Argentina’s government bonds as the current financial situation is “set to deteriorate further”.
Years of trouble.
Argentina’s markets have long been volatile against a backdrop of years of economic disaster.
Bonds and currencies tumbled after similar primary election shock results in 2019, and are now in distressed territory. The peso is currently constrained by capital restrictions that the government has been reluctant to lift.
Latin America’s third-largest economy is struggling under a severe economic crisis characterized by sky-high inflation and falling central bank reserves. Gross reserves are now $23.8 billion, although net reserves after discounting liabilities are close to $8 billion.
A rock-singing economist named Millie won on Sunday, adding new uncertainty that could shatter market confidence. However, this risk can be mitigated by Miley still having a challenging opponent in October and a possible run in November, which will test his ability to win over additional people.
Ahead of the vote, Goldman Sachs said in a note that Milley supported “radical policy proposals” such as dollarization and significant budget cuts, adding some uncertainty because he lacks a well-established political machine.
In a three-way campaign in October, he will face off against former defense minister Patricia Bullrich, who secured the primary nomination from the conservative Together for Change, and coalition candidate and Peronist economy minister Sergio Massa.
A candidate needs 40% of the vote and a 10-point advantage over the runner-up to win outright on October 22. In November, the two front-runners will face off if there is no vote. A clear winner, it seems.
“We are left with a much more uncertain situation than we expected,” said Ricardo Delgado, head of Analytica, an Argentine economics consulting firm.
Argentina is the International Monetary Fund’s largest debtor, and has authorized a $44 billion debt repayment package since 2018. Four out of ten Argentines live in poverty, and recent programs have failed to address the coxuntry’s economic woes. Inflation is over 100%.
There was no immediate response from the IMF to a request for comment on the devaluation, interest rate hikes and Argentina’s election results.
To repay the loan to the Washington-based lender, the cash-strapped economy had to use a Chinese swap line and a loan from Qatar. This is because the evaluation of the program is being discussed and subsequent payments are now suspended.
Although the nation and the fund recently reached a staff-level agreement to free up about $7.5 billion, the agreement still needs executive board approval, which is expected in the second half of August.
Eliana RaSzewski and Jorgelina do Rosario reporters; Additional reporting by Medha Singh, Jorge Otaola and Rodrigo Campos; Written by Adam Jourdan Bernadette Baum, edited by John Stonestreet and Andrew Cawthorne.
