Argentina devalues peso, raises rates after shock primary vote

A general view of the facade of Banco de la Nacion Argentina in Buenos Aires

A general view of the facade of Banco de la Nacion Argentina (Bank of the Argentine Nation), in Buenos Aires, Argentina December 7, 2021. REUTERS/Agustin Marcarian

BUENOS AIRES/LONDON, Aug 14 (Reuters) – The Argentine government devalued its currency by near 18% on Monday while the benchmark interest rate will be hiked 21 percentage points to 118%, the central bank said on Monday, as pressure built on Argentina’s financial markets following a primary election.

Congressman Javier Milei, a far-right libertarian who wants to axe the central bank and dollarize the economy, shook up the race towards presidential elections in October by far outperforming forecasts to win some 30% of the vote, the largest share with over 97% of ballots counted.

Markets were betting on a strong performance by more moderate candidates in a ballot that acts as a dress rehearsal for the national election in two months’ time.

The official FX rate will be fixed at 350 pesos per dollar until the October elections, the central bank said. The parallel informal peso dropped near 10% to a record low of 670 per dollar in early trading.

“The move to devalue the currency will help to bring it closer to fair value,” said William Jackson, chief emerging markets economist at Capital Economics.

“But the fact that the peso will be held steady until the election, rather than be allowed to fall gradually (as has been the policy up till now) will just result in the currency becoming severely overvalued again in the coming months.”

Dollar-denominated international bonds gave back part of their gains from recent weeks, while foreign investors sold Argentine stocks with the Global X MSCI Argentina ETF (ARGT.P) down 4% in U.S. trading. The local S&P Merval index (.MERV) earlier fell as much as 3.5% and was last little changed on the day.

The country’s sovereign dollar bonds fell as much as 2 cents on the dollar, with the 2038 note leading the slide, according to MarketAxess data.

The 2041 bond was trading at 31 cents on the dollar, and the 2046 was at 29.7 cents on the dollar at 1402 GMT.

Investment bank JPMorgan recommended staying “market weight” on Argentina’s government bonds as the existing financial landscape “is set to deteriorate further.”

Reuters Graphics

YEARS OF CRISIS

Against a backdrop of years of economic crisis, Argentina’s markets have long been wobbly.

After a similar primary election shock result in 2019, bonds and the currency crashed and remain in distressed territory, with the peso now held in check by capital controls the government has been unable to unwind.

Latin America’s third-largest economy has been grappling with a severe economic crisis with sky-high inflation and falling central bank reserves. Gross reserves stand at $23.8 billion but net reserves, discounting liabilities, are over $8 billion in the red, according to private analysts.

Sunday’s win by Milei, a rock-singing economist, adds an extra unknown factor that could dent market confidence, though that could be tempered by the fact he still faces a tough fight in October and a likely November run-off, which would test his ability to win over more voters.

Goldman Sachs said in a note before the vote that Milei backs more “radical policy proposals” including dollarization and sharp spending cuts, and brought some uncertainty given his lack of an established political machine.

He will compete in a three-way race in October against former security minister Patricia Bullrich, who won the main conservative Together for Change nomination, and Peronist coalition candidate and Economy Minister Sergio Massa.

A candidate needs 45% of the Oct. 22 vote to win outright or 40% and a 10-point lead over second place. If there is no outright winner, as seems likely, a head-to-head vote between the top two candidates will be held in November.

“What we are left with is a much more uncertain scenario than the one we expected,” said Ricardo Delgado, director of the Argentine economics consultancy Analytica.

Reuters Graphics Reuters Graphics

Argentina is the largest debtor to the International Monetary Fund, with a $44 billion programme approved March last year to refinance a 2018 loan. The latest programmes have failed to stop an economic crisis, with inflation running at over 100% and four out of 10 Argentines living in poverty.

The IMF did not immediately respond to a request for comment on Argentina’s devaluation and interest rate hike, or the results of Sunday’s election.

The cash-strapped economy had to tap a Chinese swap line and get a loan with Qatar to repay debt owed to the Washington-based lender, as discussions on the programme’s review dragged and further disbursements are now delayed.

Though the country recently reached a staff-level agreement with the Fund to unlock about $7.5 billion, the agreement still needs the executive board’s approval, which is expected in the second half of August.

Reporting by Eliana Raszewski and Jorgelina do Rosario; Additional reporting by Rodrigo Campos, Jorge Otaola and Medha Singh; Writing by Adam Jourdan; Editing by Bernadette Baum, John Stonestreet and Andrew Cawthorne

Our Standards: The Thomson Reuters Trust Principles.

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