The country’s long-suffering bonds slid another 10% to that derisory value after Sunday’s first-round presidential election, which saw sitting economy minister Sergio Massa leap from third place in an August primary to first with 37% of the vote.
Massa now looks like the favorite going into a Nov. 19 runoff with libertarian firebrand Javier Milei.
“It’s Massa’s election to lose,” says Shannon O’Neil, senior fellow for Latin American studies at the Council on Foreign Relations.
Voters choosing an economy minister who is presiding over 100%- plus annual inflation and a 5% contraction in the latest quarter might seem curious, until the alternatives are considered.
Argentines soured on Milei, a self-described anarcho-capitalist who scored a shock victory in the primary. They were spooked by his promises to “burn down” the central bank and replace the peso with the dollar, and past tweets describing Argentine-born Pope Francis as an imbecile and “representative of the evil one in the house of God” didn’t help his cause either.
Milei still managed a second-place finish in the latest round with 30% of the vote. Patricia Bullrich, political successor to right-of-center President Mauricio Macri, whom Argentines chucked out four years ago, lagged behind with 24%. Milei’s Freedom Advances party also grabbed dozens of the Congressional seats held by Bullrich’s Republican Proposal.
“Milei should be very happy with what he has been able to achieve even if he loses the presidency,” says Zulfi Ali, a portfolio manager for emerging markets debt at PGIM Fixed Income.
Still, Massa and his Peronist movement will likely keep calling the shots in Argentina until 2027. Not a great result, but markets won’t need great given the starting point.
“You just need things to be less bad than expected,” says Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Global Wealth Management.
They might be. Peronism, which has dominated Argentine politics since Juan and Evita surged to power in the 1940s, is a big-tent movement with varied ideological factions. Massa, leaning toward the centrist, pro-business wing, could break the hard left grip of Cristina Kirchner, a former president who has remained the movement’s power behind the throne, says Mauro Roca, managing director for emerging markets sovereign research at TCW.
“Massa will be the strong leader of a new Peronism that is pragmatic on economic issues and diplomatic relations,” he says. “He will replace Cristina Kirchner once and for all.”
Argentina’s next bond restructuring, expected in 2024 or 2025, could be more investor-friendly than the last one, hammered out in 2020, after Macri’s political collapse and at the height of the Covid pandemic, Roca adds. Creditors accepted a reduction in coupon rates from 7% to 3% and a holiday on principal payments, along with a 45% haircut. The jump in global interest rates has devalued that 3% coupon.
The principal holiday starts to expire next year, though, which likely means Argentina will need to restructure again. This time investors will look for “more carry from the get-go,” possibly offset by extending maturities, Roca says.
“The previous restructuring was so bad, there’s a lot of room for improvement,” he says. “Bonds should at least go no lower than current prices.”
No one expects Massa to slay Argentina’s underlying economic dragons. The country of 46 million is caught in a vicious cycle, Ali points out. Government overspending drives inflation, which makes citizens more dependent on social support, which drives more spending.
“It’s hard to argue that you should just rip the Band-Aid off,” Ali says.
Milei may be willing to rip if he comes back to win the second round. But he would have to grapple with the Peronists’ dominance of Congress, the key Buenos Aires regional government, and still-powerful trade unions, not to mention his inexperience.
Incremental reforms might reverse relentlessly negative sentiment, though, including: dismantling tariffs and devaluing the peso to help Argentina’s all-important agricultural exporters, rationalizing revenue sharing with provincial barons, and working with unions to ease wage inflation.
Argentina’s economy, like its bond restructuring, is so bad there is considerable room for improvement. At 26% of par, the bonds may not need much.
Write to [email protected]
Read the full article here
