Argentine peso falls sharply for a second day
Argentina’s peso tumbled for a second day as investors remained nervous about the country’s political future and the potential return of populist policies following Mauricio Macri’s decisive loss in a presidential primary vote over the weekend.
The peso slid as much as 7.4 per cent to 57.1 pesos per dollar, before paring some of its losses. Tuesday’s drop comes after the country’s currency shed more than a fifth of its value at one point during hectic trading in the previous session.
Investors also shunned the country’s dollar-denominated debt, with the yield of bonds maturing in 2028 rising 1.88 percentage points to 16.95 per cent. The once-celebrated century bond saw its price drop once again, settling at 52.1 cents on the dollar following Monday’s slide, which was the biggest fall since the debt was sold in 2017. The yield on the country’s shorter-dated debt also hovered near distressed levels.
The sell-off continued despite assurances from Peronist candidate Alberto Fernández, who won decisively in the primaries, that he does not want to default on the country’s debt.
Despite his promise, investors remain sceptical given that his running mate, former president Cristina Fernández de Kirchner, has a penchant for controversial populist policies, which left the Argentine economy on the brink of a balance-of-payment crisis after her term ended in 2015.
“The market is understandably nervous that a ticket with Cristina Kirchner as the vice-president will mean policies that are not compatible with ongoing funding from the IMF, hence the elevated restructuring risk,” said Anthony Kettle, a senior portfolio manager at BlueBay Asset Management. “The Fernández ticket does not have clearly defined policies, but they are clearly less investor friendly than the Macri ticket.”
Markets are waiting anxiously for announcements — both from Mr Macri, Argentina’s incumbent president, and Mr Fernández, who investors now almost unanimously expect to take power in December — about how they will ensure an orderly transition.
Sitting uncomfortably in the middle is the IMF, which for now is understood to be waiting for the political players to speak first to the markets. But with a record-breaking $57bn bailout programme at stake, it may not be able to wait too long.
With the first round of the presidential elections on October 27, there may be conflicting incentives for both candidates. Analysts said they may want to avoid appearing to voters to be giving in to the other side: Mr Macri will not want to give the impression that he has already lost the elections, while Mr Fernández’s more hardline supporters may be turned off by a show of moderation in a bid to calm markets.
If the uncertainty continues, some fear the volatility could continue, and potentially spiral into an even more serious situation — perhaps even sparking a run on the banks. “It’s not my base case scenario, but in this kind of situation you can’t just say: don’t worry, sleep well,” said one local economist.
Mr Macri underscored concerns about a potential debt default and the fate of the IMF programme with the country in remarks on Monday, warning of a “grave problem between Kirchnerism and the world, which doesn’t trust what it is going to do.”
Following the market rout, the odds of a sovereign default soared to 75 per cent.
“The most pressing concern is that Argentina’s elevated debt levels and ongoing financing requirements mean continued focus on reforms is essential to maintaining investor confidence and the IMF’s confidence,” said Mr Kettle. “Without that, Argentina can quickly run into a liquidity event as investors are unwilling to roll short term liabilities.”
Still, some yield-hungry investors nibbled at Argentine equities on Tuesday, with the Merval stock index rebounding 11.56 per cent, or 6.21 per cent in dollar terms. That was a sharp reversal from the carnage seen on Monday, when the country’s stocks lost nearly half of their value in dollar terms.
While Argentine assets do look cheap at current levels, Luiz Ribeiro, the lead portfolio manager for Latin American equities at DWS Group in São Paulo, said he is staying on the sidelines.
“The key variable is what Alberto Fernández will say regarding his economic policies and how he will deal with the debt,” said Mr Ribeiro. “It’ll be very hard to expect anything different from the set of policies during Kirchner’s time if he goes in that direction.”
“The likelihood of things getting worse in Argentina is huge,” he added. “I’d rather take the money and put it somewhere else.”