The week that saw Argentina bonds selloff and the peso devalue by nearly 20% is coming to an end with investors already bracing for more losses in the aftermath of outsider candidate Javier Milei’s win in presidential primaries.
(Bloomberg) — The week that saw Argentina bonds selloff and the peso devalue by nearly 20% is coming to an end with investors already bracing for more losses in the aftermath of outsider candidate Javier Milei’s win in presidential primaries.
Notes tumbled and the peso was devalued Monday after Milei unexpectedly won 30% of the vote, with debt continuing its selloff through the week. Bonds due 2030, among the nation’s most liquid, slumped almost four cents this week to around 32 cents on the dollar, hitting a two-month low on Wednesday before edging back up.
The government devalued the peso by 18% to 350 against the dollar on the official market, leading to the biggest weekly decline since 2019 and a slump in the currency on parallel exchanges. Worse may still be to come. Bank of America Corp. sees the official exchange rate weakening to 545 per dollar for the end of this year and then slumping to 1,193 by the end of 2024.
The devaluation was a move economists said was long overdue but ultimately insufficient to fix Argentina’s distorted economy. What’s more, it led shops to hike prices by 20% overnight, fueling inflation that is already in triple digits.
Traders and money managers are also preparing for another Argentine debt restructuring — it’s fourth in the last 20 years — and are looking for clues on whether Milei’s plan to scrap capital controls, dollarize the economy and shutter the central bank will actually work. Milei will meet with International Monetary Fund officials virtually on Friday to discuss his economic plan, which he said is “a lot tougher” than the demands of the Washington-based lender.
Still, Citi strategists including Donato Guarino and Luis Costa said Monday in a note that they remain overweight on Argentine debt.
The devaluation “will likely be looked upon favorably in this month’s IMF review,” while Milei will probably soften his position and try to “gather some consensus among other political forces,” they said.
Read More: Milei Promises Argentina Can Be Saved With Libertarian Economics
Milei’s dollarization plan would replicate the model used by President Nayib Bukele in El Salvador, allowing people and businesses to voluntarily use both currencies with “absolute freedom.”
Of course, it remains to be seen if the candidate can hold on to his lead in the polls ahead of the first round of voting on Oct. 22. Milei only led the more market friendly opposition candidates by 1.8 percentage points in Sunday’s vote.
“Our initial impression is that Milei may have ‘over-earned’ in this election,” Portfolio Personal Inversiones analysts led by Pedro Siaba Serrate wrote in a note. “It appears that he has fallen in love with the narrative that he will become the next president.”
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