Buenos Aires — “It’s an oxymoron to say that asset prices are falling because a pro-market guy has won” said Javier Milei on Monday, August 14, during a radio interview. Regardless of his comments, the vast majority of Argentine assets plunged yesterday and continued to do so this Tuesday, following the Libertarian’s surprise win in Argentina’s primary elections on Sunday.
The “dollar blue”, Argentina’s black market exchange rate, surged ARS$80 on Monday and closed at ARS$685. It was also shooting upward this Tuesday, surpassing the ARS$700-mark. Argentine stocks on Wall Street plunged as much as 9% yesterday, and half of them were also in the red this morning. Sovereign bonds were have also dropped at a similar pace since the elections.
To be sure, the Argentine political and economic landscape is undergoing an unprecedented earthquake due to Milei’s pole-position in 16 out of the country’s 24 electoral districts on Sunday. But the libertarian economist’s wein has left most investors scratching their heads: why would a market friendly candidate trigger such selling of Argentine assets?
For many, Milei’s proposals are arguably the most pro-market out of any candidate that took part in Sunday’s primaries. Bloomberg Línea consulted three experts for their thoughts on the market’s apparent apprehension regarding his victory.
#1 Uncertainty, Regardless of Milei’s Proposals
One of the key factors that could explain markets’ current sense of unease is the general uncertainty regarding the final outcome of the general elections in October. “While Milei achieved an excellent result, the election ends up being divided into three parts: nothing is certain for October,” stated Ignacio Sniechowski from Grupo Invertir en Bolsa.
With a three-horse race still on the cards, “every statement from candidates will create noise and volatility, and the point where all this uncertainty and volatility will naturally converge is in the currency market,” he added, referring to the steep devaluation of the peso yesterday and surging parallel exchange rates.
The Argentine market, which has witnessed sharp fluctuations in the recent past, is factoring in that Milei’s victory has added an extra dose of volatility, as his pole-position was not previously considered a likely scenario. Regardless of yesterday’s result, he mustered less than two points more than Juntos por el Cambio and was three points ahead of the government’s Unión por la Patria, leaving an extremely competitive scenario leading up to the general elections in October.
#2 Governance
Despite being a market friendly candidate, Milei would face significant challenges in implementing the radical reforms he proposes for the Argentine economy, considering that his eventual minority in Congress would imply a complex political and legislative outlook. Sniechowski pointed out that the market is indeed questioning the potential governance of a hypothetical government led by the libertarian candidate.
“I have a feeling that we are going into a scenario that is good [for Argentine assets] in the long run, as about 65% of the electorate has said ‘no’ to populism. In the short term, due to the three forces being very close, it means extreme levels of noise and volatility,” he added. In the same vein, Pedro Siaba Serrate, from Portfolio Personal Inversiones, highlighted that the market is not only assessing each candidate’s proposals, but also their ability to carry them out should they win the presidency.
His lack of experience and absence of a robust political structure are leading investors to doubt Milei’s capacity to execute his government plan, which includes complete economic dollarization and the elimination of the Central Bank (BCRA).
Immediate Impact on the Markets
The immediate impact on markets has been negative. The full “dollarization” that Milei proposes, the uncertainty regarding the feasibility of his economic plan in general and about the election results in October have led to sharp declines in asset prices.
Fernando Marull, director of FMyA, an economic consultancy, pointed out that in the short term, uncertainty will drive investors to seek coverage in order to protect themselves from the unknown.
The Central Bank has intervened to contain the parallel dollar by selling futures contracts and raising interest rates, he said.
“For bonds, in principle, this is bearish due to uncertainty and the market’s sense of surprise; the market needs to digest this. Today [for Monday], we could expect bonds and stocks to fall. Bonds could drop between 5-10%. But it’s nowhere near what happened after the Primaries in 2019,” Marull wrote.
The Optimistic View
Despite the initial fear, the economist sees the possibility of a more positive medium and long-term perspective for assets, pointing out that Milei’s victory could increase the chances of a strong fiscal adjustment, lower taxes, and reduced public spending from 2024 onwards.
If the Libertarian candidate manages to implement at least part of his plan, it could lead to an increase in bond values, with the potential for Argentina to return to the global credit markets, he added. Ultimately, the inherent uncertainty of a radical political change is what has instilled fear in the Argentine market.
While Milei’s pro-market proposals might be appealing to some, questions about his ability to implement them and short-term volatility are keeping investors on edge as they wait to see how this new chapter in Argentine politics unfolds.
