by Jorgelina do Rosario
BUENOS AIRES/LONDON (Reuters) – Argentina’s financial markets are under heavy pressure on Monday after the surprise victory in the presidential primaries of Javier Milei, a far-right ultraliberal who wants to scrap the central bank and “dollarize “the economy.
The markets were betting on more moderate candidates in this election, which serves as a dress rehearsal for the presidential election, and the Argentine stock market fell 3.5% in early trading on Monday.
The Argentinian peso fell nearly 18% on Monday morning to settle at just over 350 pesos to the dollar.
On the informal market, the Argentine currency is exchanged at 670 pesos for one dollar, a decline of 9.70%.
In order to cushion the consequences of this unexpected victory, the Argentinian central bank will raise its main interest rate to 118%, against 97% previously, and devalue the local currency to 350 pesos for one dollar, an official source said.
This new exchange rate will remain at this level until the presidential polls in October, the source added.
Investment bank JPMorgan predicted after the outcome of the primary “increasing pressure on the exchange rate, resulting in a widening gap between the parallel and official exchange rate”, according to a note led by analyst Diego Pereira.
The US bank recommends maintaining a “market weighting” on Argentine government bonds as the financial situation “is expected to continue to deteriorate”.
With nearly 90% of the ballots counted, Javier Milei creates a surprise and comes first with 30.5% of the votes. He is ahead of Patricia Bullrich of the main right-wing opposition party (28%) and the Peronist candidate of the ruling coalition, Sergio Massa, who takes third place with 27% of the vote.
These primaries aim to designate the candidates of the parties that will oppose in the elections organized in two months.
This new financial shock comes at a time when the Argentine markets are already weakened by years of economic crisis.
After the 2019 primaries, Argentine bonds and currency crashed and remain in trouble, with the peso now backed by capital controls that the government has been unable to undo.
Latin America’s third-largest economy is grappling with a severe economic crisis, soaring inflation and dwindling central bank reserves. Gross reserves stand at $23.8 billion but net reserves show a deficit of more than $8 billion, according to analysts.
Javier Milei’s victory adds uncertainty that could further undermine market confidence, although his election in October is not guaranteed before a likely undecided run-off in November.
Goldman Sachs underlined in a note published before the vote that Javier Milei supported “more radical policy proposals”, including the “dollarization” of the economy and deep cuts in public spending, and that he represented a factor of uncertainty. .
Javier Milei will face in October the former security minister, Patricia Bullrich, who won the nomination of the main conservative party, Together for Change, and the Peronist coalition candidate and economy minister, Sergio Massa.
A candidate must obtain 45% of the votes on October 22 to win, or 40% and 10 points ahead of his closest opponent. If there is no winner in the first round, as seems likely, a run-off between the two leading candidates will take place in November.
“We find ourselves with a much more uncertain scenario than we expected,” said Ricardo Delgado, director of Argentinian economic consultancy Analytica.
Argentina is the largest debtor to the International Monetary Fund, which in March 2022 approved a $44 billion program to refinance a 2018 loan. The latest programs have failed to end the economic crisis, with inflation over 100% and four out of 10 Argentines living below the poverty line.
The country even had to resort to a Chinese swap line and obtain a loan from Qatar to repay its debt to the IMF, while discussions dragged on.
Although Argentina has recently concluded an agreement with the IMF to release approximately 7.5 billion dollars, the agreement still needs to be approved by the board of directors of the international institution, which should be the case in the second half of August.
(Report Eliana Raszewski, Jorgelina do Rosario, with the contribution of Jorge Otaola, written by Adam Jourdan, Corentin Chapron, edited by Kate Entringer)
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