Argentina‘s peso currency plummeted before leveling off on Monday while stocks and bonds fell by a degree not seen in 18 years as voters signalled they could reject market-friendly President Mauricio Macri at an election in October and return the country to interventionist economics.
The peso closed 15.27 percent weaker – at 53.5 pesos per United States dollar – after plunging some 30 percent to a record low of 65 to a dollar earlier in the day. All of this occurred just after Macri suffered a heavy loss in a primary election on Sunday.
Opposition candidate Alberto Fernandez – whose running mate is former president Cristina Fernandez de Kirchner – dominated the primary vote by a much-wider-than-expected 15.5 percentage point margin over the president.
Fernandez has said he would seek to “rework” Argentina’s $57bn standby agreement with the International Monetary Fund (IMF) if he won October’s general election.
An IMF spokeswoman declined to comment on the Argentine primary result, citing a policy of not commenting on political developments in any country.
Despite Macri’s struggles to turn the economy around and tame inflation, investors see the Fernandez ticket as a riskier prospect due to the opposition’s previous interventionist policies.
Argentine stocks were among the top losers on the Nasdaq index, and the local Merval stock index closed 31 percent weaker. Falls of between 18 and 20 cents in Argentina’s benchmark 10-year bonds and century bond left them trading at around 60 cents on the dollar – or even lower.
Refinitiv data showed that Argentine stocks, bonds – and the peso – had not recorded this kind of simultaneous fall since the South American country’s 2001 economic crisis and debt default.
Morgan Stanley downgraded its recommendation for Argentina’s sovereign credit and equities from “neutral” to “underweight” and said calculations suggest the peso could fall another 20 percent.
“Given the narrow path ahead, our view is that a high degree of policy continuity is a must in order to maintain macro stability,” Morgan Stanley said in a research note. It predicted “further downside pressure and volatility” in bond prices.
Argentina’s central bank intervened, selling $105m in the foreign exchange market to defend the peso in the face of the massive selloff. The auction used the bank’s own reserves for the first time since September of last year, traders said.
Macri, a scion of one of Argentina’s wealthiest families, came to power in 2015 on promises to kick-start Latin America’s third-largest economy via a liberalisation wave.
But the promised recovery has not materialised, and Argentina is in recession, with inflation at over 55 percent.
An acute financial crisis last year hit the peso and forced Macri to take the IMF loan in return for pledging to balance Argentina’s deficit.
Sunday’s result indicated that Fernandez had enough support to clinch the presidency in October’s first round, without having to go to a November runoff election.
A candidate needs at least 45 percent of the vote, or 40 percent and a difference of 10 percentage points over the second-place runner, in order to win the presidency outright.
Argentina’s main political parties had already chosen their presidential nominees, allowing the primary to serve as a first concrete measure of voter sentiment.
The peso’s drop in value was dramatic, but Win Thin, global head of currency strategy at Brown Brothers Harriman in New York City, said he does not expect an emerging markets-wide contagion.
“It’s a very small market,” Thin said. “Ever since Macri reopened the markets, [and] took some market-friendly measures, there’s been a trickle of activity back in the peso and Argentine assets in general. Money has been trickling back in, but it is still very minimal.”
Thin added that “beyond Brazil and maybe Uruguay, it’s going to have a very limited impact from an economic standpoint.”
Edward Glossop, Latin America economist for Capital Economics, predicted even higher inflation in a country that has fought against chronic rising prices for decades.
“We will probably see inflation rising, assuming the peso doesn’t recoup some of those losses,” he said.
“The key point there is that high inflation means the peso will need to continue to weaken to maintain its competitiveness,” Glossop added. He said it was “completely feasible” for the peso to drop to as low as 70 per US dollar.
Pollsters were confounded as to how pre-primary estimates could have been off by more than 12 percentage points in some cases.
“Polls, including ours, were completely off-track. Such large errors were never seen in recent history,” read a statement from Brazilian bank BTG Pactual.
Fernandez said the market reactions were in response to Macri’s failures on the economy.
“Markets react badly when they realise they were scammed. We are living a fictitious economy, and the government is not giving answers,” he said in a radio interview Monday morning.
Voters were given a stark choice to stay the course of painful austerity measures under Macri – or return to economic policies that are heavy on state involvement.
Kirchner imposed strict currency controls that slammed investment during her 2007-2015 administration. She fought with the farm sector over export taxes and presided over a multi-year standoff with bondholders that kept Argentina locked out of the international capital markets.
“I would say they [bonds] are pricing in a much higher probability of a default,” said Aberdeen Standard EM portfolio manager Viktor Szabo.
Szabo did add, however, that they were still above the 40-cent level that would truly reflect a fully-fledged default.
Fernandez prevailed on Sunday in the majority of the country’s provinces, but one of the starker differences was seen in the poor suburbs of Buenos Aires.
What particularly dented Macri’s support were newly impoverished Argentines who were more energised to vote to punish him at the polls, political analysts said.
Analysts predicted Sunday’s results could be the final nail in the coffin for Macri.