- More market uncertainty after a surprise primary election result in Argentina
- The main Argentine stock market falls 35% and the Argentinian Peso (ARS) loses 25% of its value against the US dollar
- President Mauricio Macri lost the first round of elections by a far greater margin than expected on Sunday
- The elections seen as an indicator of his chances of re-election
- The polling suggests Argentinians will reject his business-friendly approach at presidential elections in October
Political elections in Argentina could signal the end of centre-right austerity measures and financial discipline. The domestic markets have been shredded and there is a real risk the global economy will be dragged down as well.
The Argentina peso lost approximately 35% of its value to the US dollar shortly after trading opened and intra-day touched the $60.50 mark. After a dead cat bounce, it recovered to the $52.15 level, which is still 15% lower in value than the previous close.
USDARS – Price chart: five day
USDARS – Price chart: 1998–current
The main Argentine stock market plunged more than 30% on Tuesday. Combining the currency element into the stock market moves shows the MERVAL index tumbled 48% in dollar terms on Monday.
Argentina stock exchange, MERVAL – Price chart: daily candles
The strong showing of centre-left parties in the weekend elections brings to the fore the relationship of Argentina with the International Monetary Fund (IMF). There is now an increased chance that a left-leaning president will attempt to revisit the terms of the International Monetary Fund’s bail-out package. Using local connections, Q Costa Rica reported.
“According to a local media outlet, Pagina 12, opposition party members have said that if they win in next October’s presidential elections they will renegotiate the US$56.3 billion deal, which is the biggest loan in IMF’s history”
Source: Q Costa Rica
The massive IMF loan came with terms & conditions, which include committing the Argentinian government to a strict zero-deficit budget for 2019 and a curb on Central Bank intervention.
Given the IMF’s involvement in the Argentinian situation, there is value in considering the bad news released on 23rdJuly when the International Monetary Fund revised downwards its global growth forecasts. Projected growth for 2019 is now 3.2% (down from 3.5% at the start of the year) and the growth forecast for 2020 is 3.5% (down from 3.6% previously).
Gita Gopinath, Chief Economist at the IMF said:
“Global growth remains sluggish… there are multiple factors responsible for this downgrade. Trade tensions certainly is one of those, but an important part of it is revisions downwards in emerging and developing economies where there are multiple factors including weakening domestic demand.”
The IMF’s ability to strike effective loan restructuring deals can be called into question. Investors looking for positive news on the state of the global economy will unfortunately find the database the IMF uses for economic forecasting is as good as they get.
There are always winners
Alberto Fernandez, whose running mate is populist ex-leader Cristina Fernández de Kirchner, secured 47.7% of the vote. Having an ex-leader on the same ticket gives Fernandez’s campaign added credibility. Incumbent president Macri on the other hand is the figure-head of unpopular economic reforms and received only 32.1% of the vote.
The temptation with Argentina is to frame market events in terms of a macro-economic study into international trade flows, currency spikes and sovereign debt default. Given that markets are operating in the age of ‘populism’, traders would do well to consider a bottom up approach, which goes to a more granular level and factors in the reasons why the voting intentions have swung so much. The majority of those voting appear to be little influenced by the role of Argentina as a barometer for Latin American credibility. The home truths are that the general population considers the relationship with the IMF to be borderline toxic and instead look to poverty levels in Argentina, which are currently at 36% – up from around 26% in 2018. In addition, inflation currently stands at 45% and is expected to increase this year, which according to the economic consensus would tip the country over the 50% per annum hurdle and into ‘hyperinflation’.
Forecasts are off, again
It’s a bad result for the incumbent president but it’s also a bad result for the polling industry. Jimena Blanco, head of America’s research at risk consultancy Verisk Maplecroft, was speaking from Buenos Aires on Monday morning when she told CNBC:
“Nobody – not even the most optimistic Fernandez supporters – expected to wake up to this result… There is total shock on both sides.”
So, the Argentinian primary elections follow the Brexit vote and Trump Presidential win as instances where the outcome caught the markets off guard.
Over reaction or chain reaction?
A 50% sell off in the MERVAL (in US dollar terms) might appear to be an excessive reaction to an incumbent politician not quite banking their projected levels of support. However, the presidential primaries were viewed by many as a referendum on Macri’s painful economic reforms.
The presidential elections are some months into the future, but the gap on Sunday between Macri and Fernandez was 15.5 percentage points – wider than forecast and considered too big to bridge.
For some analysts, a rejection of austerity would trigger a sequence of events that lead to another sovereign default. It is a path that Argentina has been down before. The 2005 crisis was rebranded a ‘debt restructuring’, which technically ran for nine years and problems with IMF loans to LatAm countries go back much further than 2005.
Argentina stock exchange, MERVAL – Price chart: monthly candles
Those looking to establish quite how significant the current situation is, but unwilling to give the time needed to unravel several decades of debt restructuring, do have less complex metrics to turn to. One that ensures the recent events gain the significance they deserve is that this week’s fall in the MERVAL is the second-biggest one-day fall on any of the 94 stock exchanges tracked by Bloomberg going back to 1950.