Argentina's currency is devalued by 18% after an election surprise
Over the past few years, inflation has soared to more than 100%, while an over 40% poverty rate has cast a shadow on the nation.
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The backstory: Argentina's economy has been on a bit of a roller coaster ride. Over the past few years, inflation has soared to more than 100%, while an over 40% poverty rate has cast a shadow on the nation. And in 2019, a surprise result in the country’s primary elections brought trouble, causing a dive in bond and currency values. The triumph of opposition candidate Alberto Fernández over President Mauricio Macri at the time prompted investors to panic as they feared shifts in economic strategies and possible instability in the country.
More recently: Argentina has also found itself in debt to the International Monetary Fund (IMF). The country entered a US$44 billion program last March that refinanced a previous loan with the organization and aimed to improve the country’s finances and combat inflation. Before that, the nation had already asked China and Qatar for help to make payments on the debt. And last month, the country made another arrangement with the IMF to unlock more funds from this program because of an ongoing drought that is making Argentina’s economic situation even worse. This agreement still needs approval from the IMF Executive Board, which is expected on August 23.
On top of all this, Argentina's primary elections have taken an unexpected turn. A fresh face, Congressman Javier Milei, known for his far-right libertarian views, entered the race proposing a plan – abandon the central bank and transition to a dollarized economy. Surprisingly, he snagged around 30% of the vote on Sunday, which was way more than anyone expected.
The development: Markets in Argentina were reeling after the election shakeup, which is kind of a dry-run for the October presidential election. Investors had been expecting more moderate candidates to take the lead in votes. So, the government on Monday ended up devaluing the national currency by nearly 18%. It also boosted the benchmark interest rate by 21 percentage points, setting it at 118%.The new rate of 350 pesos per dollar has been locked in until the October elections.
This had ripple effects on the financial front, impacting dollar-denominated international bonds and prompting foreign investors to offload Argentine stocks. Big names in finance chimed in too. JPMorgan, a major investment bank, advised being cautious with Argentina's government bonds, maintaining a "market weight" stance. Meanwhile, Goldman Sachs stressed that future decisions on exchange rate policies are even more important than the current move to devalue.
Key comments:
"We think Argentine USD sovereign bonds present an attractive risk-reward profile, given their depressed valuations, positive correlation to commodity prices and the potential political regime change," said Alejo Czerwonko, CIO for Emerging Markets Americas at UBS Global Wealth Management.
"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."
"We welcome the authorities’ recent policy actions and commitment going forward to safeguard stability, rebuild reserves and enhance fiscal order," said IMF Director of Communications Julie Kozack in a statement.
“Investors like Milei’s economic message, but fear the execution and institutional risk, considering his lack of power in congress and aggressive style,” said Alejo Costa, the chief Argentina strategist at BTG Pactual in Buenos Aires.
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