Argentinian investors had an election wish, then were hammered out anyway

(Bloomberg) – Argentina’s primary elections went exactly as investors wanted, scathingly berating President Alberto Fernandez and the leftist policies that rocked the economy.

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This was exactly what traders envisioned who had raised sovereign banknotes to a nine-month high before the vote – a beating so severe it would certainly lead Fernandez to finally put aside the failed policies of the Argentine radicals and look to economic orthodoxy for the last two years of his tenure.

Instead, it seems to be going in the opposite direction.

Shortly after the loss two weeks ago, Fernandez remade his cabinet replacing some of the more moderate members. He promised to increase social spending before the November vote that will decide on control of both houses of Congress. And it has accelerated the printing of money to pay for everything, a decision that risks worsening inflation, which has already reached 50%.

Bonds took a nosedive as Fernandez embarked on economic populism, posting one of the worst performances in the world since the vote and inflicting losses on investors of more than 3%. Prices recently fell to around 30 cents on the dollar, their lowest since July, over fears the spike in spending would further damage Argentina’s already precarious finances, undermine the currency and ultimately end in yet another default of several. billion dollars, the country’s fourth this century.

The lack of events on the horizon that could bring some relief ahead of the 2023 general election further adds to the pessimism in the market. A deal to rework Argentina’s $ 45 billion credit to the International Monetary Fund would already have been a positive development. But negotiations will be complicated by Fernandez’s insistence on populist spending, which will drain Argentina’s already dangerously low liquid reserves by the end of the year, according to Mauro Roca, managing director of emerging markets at TCW Group. Inc. in Los Angeles.

“Alberto Fernandez’s administration is practically banking on the midterm elections,” said Roca, who oversees $ 17 billion in emerging market assets. “There will be a return on investment for these policies in the form of inflation, and the IMF talks will take place under even worse conditions than we are seeing now.”

Investors were disappointed with the Fernandez government’s eternal pledge of restraint, waiting in vain for a loosening of capital controls, the lifting of export restrictions and an end to the pricing Argentina used to manage the economy. economy. Hopes were further dashed by post-election comments by Vice President Cristina Fernandez de Kirchner in which she blamed the President’s economic strategy for a “political catastrophe”. Now more than ever, Fernandez’s fractured ruling coalition is unlikely to agree on methods to bring the country back to growth, according to Diego Ferro, founder of M2M Capital in New York.

“You are not going to see coherent economic policies from a government run by groups of people who have very different views on the direction and identity of the country,” Ferro said. “In two years, it is difficult to know which Argentina the next government will inherit.

Fernandez’s allies suffered at the polls amid political scandals for flaunting quarantine rules and prompt access to coronavirus vaccines, as well as perceived mismanagement of the pandemic response. The opposition coalition Juntos por el Cambio has won most of the country’s constituencies, including an unexpected victory in the province of Buenos Aires, which has more than a third of the total electorate.

That’s not to say it’s all bad news for Argentines. With nearly half of the population fully vaccinated against Covid-19 and an easing of pandemic restrictions ahead of the summer tourist season, the economy is expected to rebound by nearly 7% this year, according to forecasts compiled by Bloomberg. Gross domestic product contracted by 10% last year as the country suffered one of the most prolonged lockdowns in the world.

The best bet for investors in Argentina might be to look to the recently restructured bonds of the province of Buenos Aires, which carry higher coupons than Argentine notes, according to Siobhan Morden, head of Latin America fixed income. at Amherst Pierpont in New York.

Portfolio Personal Inversiones, a Buenos Aires-based brokerage firm, suggests taking a defensive stance, abandoning the most recently issued bonds by Argentina for older securities that have slightly higher coupons and stronger legal protections. for investors.

Walter Stoeppelwerth, fund manager at Gletir Corredor de Bolsa, said Argentina’s fiscal situation makes a judgment ahead inevitable.

“The numbers don’t lie,” he said Thursday during a webinar hosted by Portfolio Personal Inversiones. “The biggest risk of being a bond holder in Argentina is that the government will run out of dollars again. “

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