Buenos Aires (Argentina), Aug. 15, 2023 – Argentina’s government devalued its currency by nearly 18 per cent on Monday while the benchmark interest rate was raised by 21 percentage points to 118 per cent, the central bank said, as financial markets reeled the day after a shock primary election result.
Congressman Javier Milei, a far-right libertarian, who wants to axe the central bank and dollarize the economy, shook up the presidential election on Sunday, winning 30 per cent of the vote, the largest share with over 97 per cent of ballots counted.
It was a huge shake-up in a ballot that acts as a dress rehearsal for the national election in October.
Markets had been betting on a strong performance by more moderate candidates.
Some investors noted that regardless of the ultimate winner, the balance of power looks likely to shift to the right.
“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 official FX rate will be fixed at 350 pesos per dollar until the October elections, the central bank said.
The parallel informal peso dropped near 10 per cent to a record low of 675 per dollar before ending at 665 according to Eikon data.
“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.”
Dollar-denominated international bonds fell, but pared losses in afternoon trading.
Foreign investors sold Argentine stocks, pushing the Global X MSCI Argentina ETF down 2.9 per cent in U.S. trading.
The local S&P Merval index fell as much as 3.5 per cent during the session but closed 3.3% higher.
The country’s sovereign dollar bonds fell as much as 4 cents on the dollar, with the 2030 note leading the slide, according to Eikon data.
The 2041 bond fell 3 points to 30.375 cents on the dollar, and the 2038 was down 3.25 points at 33.875 cents on the dollar at 1402 GMT.
Investment Bank JPMorgan recommended staying “market weight” on Argentina’s government bonds as the financial landscape “is set to deteriorate further.”
Goldman Sachs said in a note that the exchange rate policy “adopted in the future is even more important than the decision taken today to devalue.” (Reuters)
