Argentina Bonds Rise After Milei’s Victory; Peso May Drop

(Bloomberg) — Argentina investors cheered libertarian economist Javier Milei’s bigger-than-expected win in Sunday’s presidential vote and his pledges to usher in a radical remake of South America’s second-largest economy.

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The country’s most liquid overseas bonds edged higher in early European trading on Monday, as traders weighed the maverick outsider’s chances of turning around policies that have the country headed to its sixth recession in a decade with 140% inflation.

Bonds due 2035 and 2041 rose 0.6 cent and 0.8 cent on the dollar, respectively, figuring among the top 20 performers in emerging markets on the day. Both securities still trade bellow 30 cents on the dollar.

“This is the opportunity for a new beginning,” said Jorge Piedrahita, founder of Gear Capital Management in New York.

The peso is set to weaken in parallel markets used to skirt currency controls, reflecting Milei’s plan to replace it with the dollar. On Sunday, it fell to about 1,000 per dollar on local cryptocurrency exchanges. That was an 8% decline from Friday’s price of about 920 per dollar. Local markets are closed Monday for a national holiday.

“The peso is likely to remain under significant pressure,” said Leandro Galli, an emerging-market debt portfolio manager at JP Morgan Asset Management. “The FX gap between market-based measures and the official exchange rate is likely to narrow, which could lead to an acceleration of inflation in the coming year.”

Read more: Milei’s Challenges Begin Ahead of Inauguration

Milei’s victory caps a bombastic campaign that promised radical fixes to what he described as decades of misguided government policies. He pledged to slash public spending and shut down the central bank in a bid to tame inflation and shore up fiscal accounts, policies that may be a boon to bond investors who already expect another default is coming.

JP Morgan Asset Management’s Galli said this opens the door for a “potentially more draconian fiscal consolidation plan and reforms,” which may provide some support to the nation’s dollar bonds. However, upside is limited by concerns regarding the transition, governability and implementation risks.

In his victory speech Sunday night, Milei shied away from mentioning those radical fixes, in favor of a more subdued tone that highlighted the critical condition of the economy.

“Today is the beginning of the end of Argentina’s decadence,” he said. “We’ll start doing things that history has shown works, and within 35 years, we’ll return to being a world power.”

During a second speech to supporters outside his campaign headquarters, Milei shouted his signature slogan “Long live freedom, dammit!” Still, he dialed back his rhetoric on closing the central bank, mentioning the need to “fix its problems” instead.

With 99% of votes counted, Milei won nearly 56% support, compared with 44% for Economy Minister Sergio Massa, who represented continuity with the existing Peronist government. Polls had showed Milei with just a slight edge in the run-up to the election, so there was a feeling among investors that the strong mandate might make it easier to push through his policies.

While Milei gained attention for quirks that were atypical for a potential head of state — his unusual hairdo, love of his cloned dogs and a penchant for campaigning with a chainsaw — he won fans among investors for his promise to usher in a business friendly era for Argentina. Economic growth is elusive, the peso has lost more than 90% of its value in four years, and around 40% of the population lives in poverty.

“It’s a vote in favor of reforms, but with tremendous execution risks,” said Patrick Esteruelas, the head of research at Emso Asset Management. “The upside will be capped by skepticism over whether he can politically survive an adjustment with limited support in Congress.”

Milei’s La Libertad Avanza party controls only a handful of seats in congress, and policies like dollarization would be an incredibly complex undertaking even with broad political support. Slashing government outlays will be a burden on Argentina’s poorest citizens.

What Bloomberg Economics Says

The lead-up to Milei’s Dec. 10 inauguration could be rocky. The outgoing administration can still tinker with the currency, reserve levels and public spending. Markets will pay close attention to his cabinet announcements. Asset-price moves — especially in the parallel exchange rate — could help shape the near-term inflation outlook.

— Adriana Dupita, Brazil and Argentina economist

— Click here to read the full report.

Still, some investors think Milei is the best shot at salvaging the economy after years of market pain. The nation’s overseas bonds handed investors losses of more than 40% since they were restructured in 2020, among the worst showings in emerging markets.

“The question is more about Milei’s ability to get things done,” said Diego Ferro, founder of M2M capital in New York. “And that is where I think there’s still a big question mark. But the near-term prognosis should be higher bond prices.”

–With assistance from Srinivasan Sivabalan.

(Updates prices in second and third paragraphs, adds investor comments starting in sixth paragraph.)

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