Argentina investors brace for pain regardless of who wins presidency
Peronist Sergio Massa or right-wing libertarian Javier Milei face stark choices in seeking to reverse an economy in dire straits
New York — Global investors expect much financial pain out of Argentina no matter who voters elect on Sunday as their next president, with social unrest as top of mind as a much-needed fiscal adjustment is likely to lead to even more inflation.
Economy minister Sergio Massa and populist outsider Javier Milei go head to head in the November 19 presidential election run-off, a choice between sticking with the current Peronist government or veering to a right-wing libertarian.
The winning candidate, who would take office on December 10, would need to fix an economy with inflation of 143%, a messy array of capital controls, a looming recession and negative net foreign currency reserves JPMorgan pegs at $15.3bn.
“There is no room left to muddle through with the current economic policy stance, and the incoming president will have to take a turn in economic policy,” Barclays’ Latin America economist Pilar Tavella said in a note on Wednesday.
“How sharp of a turn will depend on a combination of their commitment to reform and the political muscle to execute it.”
Milei’s shock therapy approach includes scrapping the central bank and dollarising the economy, while Massa’s proposal is one of more gradual change by trimming the fiscal deficit and spurring more exports to rebuild reserves.
Argentina had agreed to cut its primary fiscal deficit to 1.9% of GDP this year to comply with a $44bn IMF programme that has helped keep the lights on while the agricultural exporter faced a debilitating drought.
The deficit is set to be much wider, with Itau pinning it at 3% of GDP by year-end. The IMF has internally hardened its view on the programme and could get tougher on disbursements, meaning the next $3bn is no longer a given.
“The most likely scenario is that we see both parties sitting down with a clean sheet of paper and redesigning the programme,” said Alejo Czerwonko, CIO for emerging markets Americas at UBS Global Wealth Management.
“The existing framework and agreement are damaged beyond repair so a change in government offers everybody the opportunity to come up with a new plan.”
The economy is probably already in recession and is expected to contract again next year. Inflation is seen hitting 185% by the end of 2023 after last year’s near-100%.
Part of the blame goes to policies that encouraged money printing at the central bank, which the Peronist coalition in power has — successfully so far — used to boost Massa’s chances of winning the presidency.
Shortly after being sworn in as economy minister, Massa in August 2022 pledged to stop printing money to fight inflation.
“When a person who did something fiscally irresponsible tells you ‘Once I am elected I will be fiscally responsible’ I think it is reasonable to doubt,” said Carlos de Sousa, emerging markets debt strategist at Vontobel Asset Management.
“Markets are likely to prefer a Milei victory simply because he is more credible on delivering the fiscal adjustment.”
Continuing to dismantle energy subsidies, which totalled $12bn last year, will be high on the agenda.
Investors also agree that the Argentine peso is over-valued, meaning a devaluation probably is on the cards. The official exchange is around 350 pesos per dollar while the black market rate is nearly 1,000.
But a devaluation would trigger a further spike in inflation, which hits the poor the hardest. With 40% of the population already under the poverty line in Argentina, there is concern if the number grows much higher the streets will flood with protesters and social unrest will explode.
UBS sees the official exchange rate ending 2023 at 550 pesos, then jumping to 1,350 by end-2024 and 1,900 by end-2025.
Social unrest “is a risk that remains top of mind for most,” said UBS’s Czerwonko. “Every investor understands that the macro-economic adjustments that Argentina needs will inevitably translate into short-term pain.”
For investors, Argentine stocks traded in New York have been a beacon of hope, up almost 15% year to date. But that comes after a near 50% year-to-date gain four months ago, and the underperformance is expected to continue regardless of who wins, according to JPMorgan’s Diego Celedon.
“Regardless of the outcome, Argentine equities will face a challenging scenario that should prevent the market from outperforming,” Celedon wrote in a client note.
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