Argentine Markets Steady, but Political Instability Drives Uncertainty

People walk in front of a screen showing the value of foreign currencies against the Argentine peso in Buenos Aires on Tuesday. Photo: juan ignacio roncoroni/epa/Shutterstock

BUENOS AIRES—Argentine financial markets steadied after their historic rout a day earlier, but some economists said the country is heading for prolonged financial instability amid the growing likelihood that the left-wing Peronist movement will return to power in October elections.

The peso weakened a further 4.7% against the U.S. dollar by late Tuesday afternoon, following losses of about 15% on Monday. The Merval stock market fared better, gaining more than 10%, following a 38% plunge on Monday.

Carlos Fabbio, a trader at Buenos Aires-based brokerage firm Zarracan, described the rise in stock prices as “a dead-cat bounce.”

The markets rout will deepen the economic pain for a country that has a toxic combination of debt, high inflation and recession. Argentina’s economy shrank 5.8% in the first quarter from the year-earlier period, though it showed signs of recovery in recent months. Inflation was at 55.8% in June, among the world’s highest.

Presidential candidate Alberto Fernandez voted in a primary in Buenos Aires on Sunday. Photo: Carol Smiljan/NurPhoto/Zuma Press

The plunge in the peso and stocks came after an unexpectedly strong showing by left-wing presidential candidate Alberto Fernández in Sunday’s primary election, making him the heavy favorite to defeat center-right President Mauricio Macri in October’s presidential vote.

Mr. Fernández’s running mate is Cristina Kirchner, the former president whose 2007-15 government nationalized companies, ran large budget deficits and defaulted on the country’s debt. Although Mr. Fernández has said his government “won’t be crazy,” investors are still wary of what direction his economic policy could take if he wins.

“The weakness in the peso and equities reflect fears that they’re going back to the bad old days of Kirchner,” said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York. “We don’t really know what will happen until they’re in office and markets fear the worst.”

President Mauricio Macri spoke at a press conference in Buenos Aires on Monday. Photo: agustin marcarian/Reuters

For Mr. Macri, the plunge in the peso may kill off any chance he has at winning the Oct. 27 vote, many economists said. A weaker peso will help exports, but keep pressure on prices by making imports more expensive in local-currency terms. It will force the central bank to maintain sky-high interest rates that will strangle an economic recovery.

“The noose will tighten, the economic recovery will be aborted and this is the price to pay for the way people voted,” said Arturo Porzecanski, an American University economist who closely tracks Argentina.

Given that Mr. Macri doesn’t leave office until December, that sets up the Argentine economy for a long period of uncertainty. “The abrupt beginning of an apparent ‘lame-duck’ period sharply increases concerns about government stability during a de facto long transition period,” Mariano Pablo Machado and Jimena Blanco, analysts at Verisk Maplecroft, wrote in a note to clients on Tuesday.

Mr. Macri could point to the market turbulence as a glimpse of what awaits the country if voters elect Mr. Fernández, said Alberto Ramos, chief economist at Goldman Sachs. But few people expect that strategy to work.

Like many others here, 29-year-old shopkeeper Veronica Lopez blames Mr. Macri for the instability. “We were doing badly in January, but this now will knock us out,” she said. She said her suppliers don’t want to give her new merchandize until the peso stabilizes, and consumers are too afraid to spend.

In the past 25 years, some 85% of emerging markets where the currency has fallen by 15% or more in a single day—like the peso on Monday—have fallen into recession, said William Jackson, chief emerging-markets economist at Capital Economics. Roughly half have led to sovereign-debt defaults, he added.

Mr. Fernández, for his part, will face significant constraints if he wins. The powerful agricultural sector, which accounts for most of the country’s hard-currency earnings, will be wary of the kind of state controls Ms. Kirchner applied to them.

“They won’t be able to push a hard-left Peronist policy,” said Robert Scott III, a professor of economics at Monmouth University in New Jersey. “They’ll have to install capital controls, of course, but they’ll also need to understand that the agriculture sector and business sector will need to have some benefits.”

Mr. Fernández has also vowed to honor the country’s debt, especially $57 billion owed to the International Monetary Fund as part of the country’s 2018 bailout engineered by Mr. Macri. Mr. Fernández is likely, however, to ask the IMF for an easier repayment schedule.

It remains unclear if the Peronists will be willing to take the steps needed to keep paying debts if the economy struggles, Mr. Ramos said.

“Even if they say the right thing now, the market may not take it at full value. There is a stigma being associated with the people that created the problem in the first place. And that is problematic because the economy and sentiment is very, very fragile,” he said.

Write to Ryan Dube at [email protected] and Jeffrey T. Lewis at [email protected]

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