© Reuters. FILE PHOTO: Argentina’s President Javier Milei addresses supporters from the Casa Rosada balcony, as his sister Karina Milei and his partner Fatima Florez look on, after his swearing-in ceremony, in Buenos Aires, Argentina December 10, 2023. REUTERS/Agust
By Marc Jones and Rodrigo Campos
LONDON (Reuters) -Argentina’s financial markets made a groggy start to the Javier Milei era on Monday as they waited for the new president to launch into his promised economic shock therapy.
The official peso, which some of the market is focusing on amid calls for a reset, dipped in line with a controlled devaluation set in place months ago. Dollar bonds inched lower, and stocks were mixed, with those trading offshore mostly flat while the local market rose over 2%.
Milei, 53, took office on Sunday with a warning in his inaugural speech that he had no alternative to a sharp, painful fiscal shock to fix the country’s “titanic” challenges.
Milei’s speech was light on detail regarding the economic plans, but he reiterated there would be a fiscal adjustment equivalent to 5% of GDP through cuts that would fall on “the state and not the private sector.”
A government spokesman said Monday that key measures would be laid out on Tuesday by the new economy minister, Luis Caputo.
Minutes of the first cabinet meeting shared with Reuters show some of the items the team is looking at include the government payroll and revision of contracts from every ministry, as well as direct contracts with universities.
“The problem is that most people who voted for Milei didn’t vote for him because of the economic transformation, but because they hated the other guys,” said Viktor Szabo, an emerging markets portfolio manager at abrdn.
“You can gain time from the market if you make the right noises, but you have a population that over the last 50 years has gotten used to Peronism, so it will be hard to explain to them that there is hardship to come.”
The task of enacting deep cuts to public spending looks daunting with hyperinflation and a recession looming and the government’s reserves thoroughly depleted.
DEBT BOMB
Serial defaulter Argentina is scheduled to pay over $4 billion to the International Monetary Fund and to private sector creditors by the end of January. It owes $90 billion and $25 billion in local and foreign currency debt payments, respectively, for 2024 as a whole, JPMorgan calculates.
Ratings agency Fitch on Monday remained of the view that “a restructuring or other default event of some sort is more likely than not in the coming years.”
Yet with dollar bond prices still below 40 cents after a weeks-long rally, some say that scenario is priced in.
“It trades at half the price of countries that are in default, so if there’s another restructuring the market is not going to get shaken up by that,” said Shamaila Khan, head of fixed income for emerging markets and Asia Pacific at UBS Asset Management.
“The important thing to me is what is the environment after? What are the policies that accompany either a restructuring, or an exchange, or a buyback, because it’s hard to imagine that Argentina will improve to an extent that they can issue bonds at par next year.”
WOBBLY MARKETS
Stocks traded offshore were little changed as a group, with the MSCI Argentina index down less than 0.1%. The local Merval benchmark in pesos rose 2.5% to a record high.
U.S.-traded shares of banks such as Grupo Supervielle, Banco Macro and Banco Bbva Argentina rose between 1% and 2% while Grupo Financiero Galicia shed 1%.
Argentina’s central bank, still technically run by the outgoing team, said on Monday it would restrict currency market transactions focusing on high-priority trades during the “transition” period as the new bank leadership was put in place and policies announced.
With a big devaluation decision in the market’s top of mind, the central bank weakened the peso’s official rate by a modest 0.55% to 366.10 per dollar, in line with a months-long controlled devaluation.
BlueBay Asset Management’s Graham Stock said that after a string of recent local press reports he expected the rate to be slashed to around 650 to the dollar, while analysts at Morgan Stanley predicted 700 per dollar.
The inaugural speech “was for show but now he (Milei) needs to get down to the hard graft of governing,” Stock said. “We are cautiously constructive from here,” he added. “But let’s see what the policy steps are.”
The government’s measures will involve a major cut to fiscal outlays but also some increased social spending, presidential spokesman Manuel Adorni said at a press conference, reflecting the challenge Milei faces in avoiding social unrest.