Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
11,872.1031.65
Stock Analysis, IPO, Mutual Funds, Bonds & More

Argentina vote spells volatility ahead (again) for markets

The peso crashed 17.6%, bonds tumbled 19.6% and the local stock market lost 31.3% in the week after the primary.

Reuters|
Oct 21, 2019, 04.48 PM IST
0Comments
Reuters
Argentina-Market---Reuters
Most economists said that if Fernandez won and signalled anti-market policies, bonds and unofficial peso rates could suffer again.
BUENOS AIRES: Argentine markets, in a holding pattern since a crash in August, are set for a new bout of nerves after the country holds a presidential election on Sunday, likely to confirm defeat for business-friendly President Mauricio Macri.

Macri, who came to power in 2015 pledging to open up Argentina's markets and attract overseas investment, lost by a massive 16 points in August primaries, sparking the worst rout of the country's markets in decades.

The peso crashed 17.6%, bonds tumbled 19.6% and the local stock market lost 31.3% in the week after the primary.

Markets recovered slightly after capital controls were imposed in early September, and have calmed down as traders wait on the sidelines reading the political runes.

The Oct. 27 vote could unleash volatility once more, a Reuters poll of 14 economists showed, despite most investors already assuming defeat for market-friendly leader Macri against Peronist rival Alberto Fernandez.

"The market will become erratic as it watches for Fernandez's cabinet to be named and the direction of his economic policy," said Jose Echague, a Buenos Aires-based strategist at Consultatio Investments.

Most economists said that if Fernandez won and signalled anti-market policies, bonds and unofficial peso rates could suffer again. The left-leaning candidate is running with populist ex-leader Cristina Fernandez de Kirchner.

The unofficial "blue chip" peso rate would likely spike to 80 pesos per dollar, from 74 pesos now. The official spot rate would be more muted, rising to 65 pesos from 58 pesos now, the average response from economists showed.

Bond prices would also take a significant hit, the poll showed, with estimates for the country risk index hitting 2,200 basis points, above the current level of around 2,060 points.

The official peso-dollar rate, however, would be cushioned to a degree by capital controls imposed last month by Macri to help stave off a further sharp depreciation of the currency and stem a drain on the country's foreign reserves.

The steep primary victory suggested Fernandez would win enough votes in the October election to sweep his party into power without needing a second round runoff in November. He would need 45% of votes, or 40% and a 10-point lead over Macri.

'MILD POPULISM'
The economists, who mostly spoke on condition of anonymity, forecast that a Fernandez administration would be "mild populist", seeking to cool inflation and revive the sluggish economy, but edging away from Macri's more free-market approach.

However, analysts were skeptical about the chances of policies touted by Fernandez so far, such as cuts to sky-high interest rates or boosting taxation.

"Inflation is unlikely to fall in 2020 with these measures; reserves will keep falling and it's very hard for them to reach a fiscal surplus with tax increases alone," said David Kohn, economics professor at the Pontifical Catholic University of Chile.

In the short term, the focus is on how Fernandez would deal with the International Monetary Fund (IMF) and other creditors, after the country was forced to delay payments on around $100 billion of local and foreign debt.

Falling into default would be hugely damaging for Latin America's third largest economy, making it once more a pariah of global investors and shutting off important funding channels.

Most of the economists polled said Fernandez would have to meet investors "half-way", with likely prolonged negotiations that meant no quick solution, but that would also probably avoid a full-on default.

"The IMF will have to negotiate with Fernandez ... because it will want to avoid a financial crisis that could easily impact emerging markets," said Andres Abadia, economist at Pantheon Macroeconomics.

"Fernandez needs the IMF and private debt, and he will have to make concessions to generate some confidence."
Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service