Argentina devalues peso, raises rates after shock primary vote

BUENOS AIRES/LONDON – Argentina’s government devalued its currency by nearly 18% on Monday, while the benchmark interest rate was raised by 21 percentage points to 118%, the central bank said, as finance walks shaken the day after a shock result of the primary elections.

Congressman Javier Milei, a far-right libertarian who wants to abolish the central bank and dollarize the economy, rocked the presidential election on Sunday, winning 30% of the vote, the highest share with more than 97% of the ballots counted. .

It was a huge upheaval in a ballot that serves as a dress rehearsal for the national election in October. Walks had bet on a solid performance of more moderate candidates. Some investors have noted that regardless of the eventual winner, the balance of power looks likely to shift to the right.

“We believe Argentine USD sovereign bonds present an attractive risk-reward profile, given their depressed valuations, positive correlation to commodity prices and potential political regime shift,” said Alejo Czerwonko, CIO. for Emerging Walks Americas at UBS Global Wealth Management.

The official exchange rate will be pegged at 350 pesos to the dollar until the October elections, the central bank said. The parallel informal peso fell nearly 10% to a record high of 675 to the dollar before ending at 665 according to Eikon data.

“The decision to devalue the currency will help bring it closer to its fair value,” said Emerging Markets chief William Jackson. walks economist at Capital Economics.

“But the fact that the peso will be held stable until the election, rather than let it fall gradually (as has been the policy so far) will only lead to another severe overvaluation of the currency in the coming months. come.”

Dollar-denominated international bonds fell, but pared losses in afternoon trade. Foreign investors sold Argentina actions, pushing the Global X MSCI Argentina ETF down 2.9% in US trading. The local S&P Merval index fell 3.5% during the session but closed up 3.3%.

The country’s sovereign dollar bonds fell 4 cents on the dollar, with the 2030 rating leading the fall, according to data from Eikon.

The 2041 bond was down 3 points at 30.375 cents on the dollar, and the 2038 was down 3.25 points at 33.875 cents on the dollar at 1402 GMT.

Investment bank JPMorgan recommended staying “walk weight” on Argentine government bonds as the financial landscape “is about to deteriorate further”.

Goldman Sachs said in a note that the exchange rate policy “adopted in the future is even more important than the decision taken today to devalue”.

years of crisis

argentina walks have long been shaky as the country went through years of economic crisis. Inflation has reached over 100% and four out of 10 Argentines live in poverty.

After a similar primary election shock in 2019, bonds and the currency have crashed and remain in troubled territory. The government has been unable to lift capital controls used to prop up the peso as Latin America’s third-largest economy grapples with skyrocketing inflation and dwindling central bank reserves. Gross reserves are $23.8 billion, but private analysts say net reserves, discounting liabilities, are in the red by more than $8 billion in the red.

Milei’s Sunday win adds another unknown that could hurt walk confidence, although he faces a tough fight in October and a likely runoff in November. The rock-singing economist will take part in a three-way race in October against former security minister Patricia Bullrich, who won the conservative Together for Change nomination, and the Peronist coalition candidate and minister of government. Economy Sergio Massa.

A candidate needs 45% of the votes on October 22 to win, or 40% and a 10-point lead over second place. If there is no outright winner, as seems likely, a head-to-head vote between the top two contenders will take place in November.

“What we are left with is a much more uncertain scenario than we expected,” said Ricardo Delgado, director of Argentinian economic consultancy Analytica.

Argentina is the International Monetary Fund’s biggest debtor, with a $44 billion program approved last March to refinance a 2018 loan.

“We welcome the authorities’ recent policy actions and their commitment going forward to preserve stability, rebuild reserves, and strengthen fiscal order,” IMF communications director Julie Kozack said in a statement.

The cash-strapped economy had to tap the Chinese swap line and secure a loan with Qatar to pay off debt owed to the Washington-based IMF. Further disbursements are now delayed even though the country recently reached a staff-level agreement with the Fund to release about $7.5 billion. This deal still needs to be approved by the board, which will meet to discuss it on August 23.

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