Buenos Aires Province debt climbs as Milei confronts local election test

Investors are snapping up debt from Argentina’s largest province on bets that President Javier Milei’s political party will extend its winning streak in another local election in less than three months.

Dollar notes issued by Buenos Aires Province are the best-performing government credits across emerging-markets since the president’s libertarian bloc, La Libertad Avanza or LLA, won in a city hall race in mid-May, according to pricing data compiled by Bloomberg.

Now, bondholders wager that Milei – with a tighter grip on the country’s political right – will be in a better position to fend off challenges from the Peronist opposition in the province’s legislative contest this September. His allies are currently working to seal an alliance with former president Mauricio Macri’s PRO party to jointly field candidates in the region.

The vote will serve as an important temperature check of voter sentiment ahead of the midterm elections in October, when Milei will seek more seats in both houses of Congress.

Buenos Aires Province accounts for more than a third of the country’s voters and has historically swung left. Money managers are keen for any signals on whether the government’s strict austerity project still has popular support. So far, they’re optimistic about the president’s chances. 

“It looks like LLA and PRO are well positioned to gain space in the provincial legislature,” said Carlos de Sousa, a portfolio manager at Vontobel Asset Management, who cited Milei’s progress in taming inflation and sparking economic growth following a brutal recession.

Growing divides

Adding to Milei’s election prospects are tensions between the leaders of Argentina’s centre-left coalition. 

After months of jabs between ex-president Cristina Fernández de Kirchner and Buenos Aires Province Governor Axel Kicillof, the former announced she’s running for a seat on the provincial legislature on Monday. 

Kicillof was long considered Fernández de Kirchner’s protégé but in recent months carved out a path of his own as a potential presidential candidate.

“This is a power play,” said Joaquín Bagues, managing director at local brokerage Grit Capital Group. Kirchner is saying “‘This is mine. If you want it all, you have to beat me here,’” he added. 

Should the divisions on the left persist, it stands to push the extra yield investors demand to hold Buenos Aires Province debt over similarly-dated Argentine sovereign paper below 200 basis points, according to Ramiro Blazquez, a strategist at StoneX.

That risk premium currently stands at roughly 240 basis points, down from a high of around 990 basis points in March 2024, according to pricing data compiled by Bloomberg.

Spending cuts

The state is one of the few that have failed to generate a fiscal surplus for at least the past 20 years, Jefferies strategist Javier Kulesz wrote in a note dated May 7.

Adding to the woes, Buenos Aires Province has borne the brunt of the president’s spending cuts, some of which bypassed congressional support. The state faced a sharp drop in federal funding in 2024.

While some of that money is expected to return in 2025, the administration has so far been “very selective” in allocating additional resources to provinces, according to economists Juan Manuel Pazos and Santiago Resico of brokerage firm one618.

However, a Milei-friendly result in the September vote may push the administration to change its approach. It “opens up the possibility of the province’s leadership being aligned with the national government after 2027,” said Graham Stock, senior emerging-markets sovereign strategist with RBC Bluebay. That might imply a recovery in discretionary transfers, he added.

To be sure, concerns over the province’s spending have eased in recent months, with its fiscal deficit narrowing to US$623 million in 2024 from US$1.17 billion the year before, according to data compiled by one618. Investors have also shown confidence in the province’s ability to meet bond payments of over US$350 million due later this year.

“Buenos Aires has not only demonstrated resilience to recent economic shocks, but it is also well positioned for the near term,” said Pablo López, Economy Minister for Buenos Aires Province.