A general view of the facade of the Argentine Nation Bank in Buenos Aires, Argentina December 7, 2021. REUTERS/Agustin Marcarian
BUENOS AIRES/LONDON, Aug 14 (Reuters) – Argentina’s government devalued its currency by nearly 18% on Monday, while interest rates were hiked 21 percentage points to 118%, the central bank said, as financial markets slumped the day after a Year faltered Shocking primary result.
Congressman Javier Milei, a far-right libertarian who wants to abolish the central bank and turn the economy into dollars, stirred up Sunday’s presidential election, winning 30% of the vote, the largest share with over 97% of the ballots counted.
It was a major shock in a ballot that serves as a dress rehearsal for the general election in October. Markets had been betting on a strong performance from more dovish candidates. Some investors noted that regardless of the ultimate winner, the balance of power is likely to shift to the right.
“We believe Argentinian USD government bonds offer an attractive risk/reward profile given their low valuations, positive correlation to commodity prices and possible political regime change,” said Alejo Czerwonko, CIO for Emerging Markets Americas at UBS Global Wealth Management.
The official exchange rate will be fixed at 350 pesos per dollar until the October elections, the central bank said. The parallel informal peso fell almost 10% to a record low of 675 per dollar before ending at 665, according to Eikon data.
“The move to devalue the currency will help bring it closer to fair value,” said William Jackson, chief emerging market economist at Capital Economics.
“But the fact that the peso is being held steady until the election, rather than dropping gradually (as has been the case so far) will only result in the currency becoming grossly overvalued again in the coming months.”
Dollar-denominated international bonds fell but pared losses in afternoon trade. Foreign investors sold Argentina stocks, dragging the Global X MSCI Argentina ETF (ARGT.P) down 2.9% in US trading. The local S&P Merval Index (.MERV) fell as much as 3.5% during the session but closed 3.3% higher.
The country’s dollar-denominated government bonds fell as much as 4 cents against the dollar, with the 2030 bond leading the decline, according to Eikon data.
The 2041 bond fell 3 points to 30.375 cents per dollar and the 2038 bond fell 3.25 points to 33.875 cents per dollar at 1402 GMT.
Investment bank JPMorgan recommended keeping the “market weight” on Argentine government bonds as the financial landscape “is likely to continue to deteriorate”.
Goldman Sachs said in a note that future exchange rate policy is “even more important than today’s decision to devalue.”
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YEARS OF CRISIS
Argentina’s markets have long been unstable as the country endured years of economic crisis. Inflation is over 100% and four out of ten Argentines live in poverty.
After a similar shock outcome in the 2019 primary, bonds and the currency plummeted and remain distressed. The government has failed to lift capital controls to support the peso as Latin America’s third largest economy struggles with skyrocketing inflation and dwindling central bank reserves. Gross reserves are $23.8 billion, but private analysts estimate net reserves, minus liabilities, to be over $8 billion in the red.
Milei’s win on Sunday adds another unknown factor that could weigh on market confidence despite an uphill battle in October and a likely November runoff. The rocking economist will face off in a three-way battle in October against former Security Minister Patricia Bullrich, who won the Conservative Together for Change nomination, and Peronist coalition candidate and Economy Minister Sergio Massa.
A candidate needs 45% of the October 22 votes to win the overall vote, or 40% and a 10-point lead over the runner-up. If there is no clear winner, which is likely, there will be a direct vote between the two frontrunners in November.
“What we are left with is a much more uncertain scenario than what we anticipated,” said Ricardo Delgado, director of Argentina-based economic consultancy Analytica.
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Argentina is the International Monetary Fund’s largest borrower and last March approved a $44 billion program to refinance a 2018 loan.
“We welcome recent policy actions and the authorities’ commitment to the future to ensure stability, rebuild reserves and improve financial governance,” said Julie Kozack, IMF communications director, in a statement.
The financially troubled economy was forced to draw on the Chinese swap line and borrow from Qatar to repay debts to the Washington-based IMF. Further disbursements are now being delayed, although the country recently reached a staffing agreement with the fund to release around $7.5 billion. This agreement has yet to be approved by the board, which will meet on August 23 to discuss it.
Reporting by Eliana Raszewski and Jorgelina do Rosario; Additional reporting by Rodrigo Campos, Jorge Otaola and Medha Singh; writing by Adam Jourdan; Edited by Bernadette Baum, John Stonestreet, Andrew Cawthorne and David Gregorio
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