by Eliana Raszewski and Jorgelina do Rosario
BUENOS AIRES/LONDON (Reuters) – Argentina’s markets are likely to have a tough wake up call on Monday after the surprise primary victory of Javier Milei, a far-right ultraliberal who wants to scrap the central bank and dollarize the economy.
With nearly 90% of the ballots counted, Javier Milei created a surprise and came out on top with 30.5% of the votes. He is ahead of Patricia Bullrich of the main right-wing opposition party (28%) and the Peronist candidate of the ruling coalition, Sergio Massa, who takes third place with 27% of the vote.
The primaries aim to elect the candidates of the parties which will oppose during the general elections which will be held in two months.
The surprise result could weaken the peso in parallel markets on Monday and weigh on bonds that had rallied in recent weeks.
JPMorgan foresees “increasing pressure on the exchange rate, resulting from a widening gap between the parallel exchange rate and the official exchange rate,” according to a note led by analyst Diego Pereira.
The official exchange rate is 287 pesos per dollar, while the black market exchange rate is more than half as favorable.
The US bank recommended maintaining a “market weighting” in Argentina’s government bonds as the financial situation “is expected to continue to deteriorate”.
Argentinian markets are weakened by years of economic crisis.
After similar primaries in 2019, bonds and the currency have crashed and remain struggling, with the peso now backed by capital controls that the government has been unable to undo.
Latin America’s third-largest economy is grappling with a severe economic crisis, soaring inflation and dwindling central bank reserves. Gross reserves stand at $23.8 billion, but net reserves are over $8 billion short, according to private analysts.
Javier Milei’s victory adds further uncertainty that could dent market confidence, although he still faces a tough fight in October and a likely second round in November, which makes the possibility of a win less likely.
Goldman Sachs said in a memo ahead of the vote that Javier Milei backs “more radical policy proposals,” including dollarization and deep spending cuts, and brings some uncertainty.
The candidate will take part in a three-way race in October against former security minister Patricia Bullrich, who won the nomination of the main conservative party, Together for Change, and the candidate of the Peronist coalition and minister of the economy, Sergio Massa.
A candidate must obtain 45% of the votes on October 22 to win, or 40% and 10 points ahead of the second candidate. If there is no winner in the first round, as seems likely, a second round between the top two contenders will take place in November.
“We find ourselves with a much more uncertain scenario than we expected,” said Ricardo Delgado, director of Argentinian economic consultancy Analytica.
Argentina is the largest debtor to the International Monetary Fund, which in March 2022 approved a $44 billion program to refinance a 2018 loan. The latest programs have failed to end the economic crisis, with inflation over 100% and four out of ten Argentines living below the poverty line.
The country even had to resort to a Chinese swap line and obtain a loan from Qatar to repay its debt to the IMF, while discussions dragged on.
Although the country recently reached an agreement with the IMF to release about $7.5 billion, the deal still needs to be approved by the board, which is expected to be done in the second half of August. .
(Report Eliana Raszewski, Jorgelina do Rosario, with the contribution of Jorge Otaola, written by Adam Jourdan, French version Corentin Chapron, edited by Kate Entringer)
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