Election’s rightward shift spurs investor optimism

Argentina’s presidential election looks increasingly likely to usher in a pro-business government after the ruling Peronist bloc coalesced around centrist Economy Minister Sergio Massa as its candidate.

Benchmark overseas bonds gained to the highest since March following the announcement late Friday that Massa would represent the ruling coalition in the October election. Argentina’s parallel foreign-exchange rate strengthened as much as six percent at the market open before paring most of the gains.

Massa’s decision to run was seen as a sign that Vice-President Cristina Fernández de Kirchner, an advocate for many of the measures that have left the country in dire financial straits, is seeing her influence wane.

“This is Cristina losing power,” said Mariel Fornoni, the director of polling firm Management & Fit in Buenos Aires. “All of the options are a lot more pro-market.”

Investors are looking to the election to end years of financial mismanagement in Argentina that has led to triple-digit inflation, massive currency losses, a shrinking economy and growing social discontent. Analysts hoping for a rightward shift have been watching closely to see who Fernández de Kirchner would support in the contest, and were encouraged after her close ally, Interior Minister Eduardo ‘Wado’ de Pedro, dropped out at the last minute to support Massa.

The potential political change in Argentina would buck a leftist tide that has washed over Latin America in recent years. Widening inequality and social discontent during the Covid pandemic pushed voters in Colombia, Chile, Peru and Brazil to elect presidents who promised to prioritise social issues. Argentines have lost confidence in their own populist government after its policies deepened an economic crisis that began in 2018.

With Massa favoured to win the August 13 primary, market-friendly candidates compose a fragmented field. Hard-liner Patricia Bullrich and centrist Buenos Aires Mayor Horacio Rodríguez Larreta face off in their own primary for the main, pro-business coalition. Outsider libertarian economist Javier Milei is also a key player in this year’s race.

“If the opposition gets too polarised, it leaves a wide open space in the middle that, strategically, the Peronist bloc will try to fill,” said Juan Cruz Díaz, managing director of Cefeidas Group, a political consultancy.

Argentina’s next president faces a formidable task to get the economy on a path toward growth. Annual inflation is running above 110 percent, analysts expect a recession soon and almost 40 percent of the population lives in poverty. Argentina is also almost out of dollars, mired in a brutal drought and needs to begin paying back a US$44-billion loan from the International Monetary Fund.

Minister and candidate

Argentina’s dire straits are also a liability for Massa — after all, he’s the nominal head of economic policy during a horrible time for the economy. Sovereign bonds have traded below 30 cents on the dollar for much of his 10-month tenure, suggesting that investors expect a painful restructuring ahead. He’s expanded price controls, tightened import restrictions and implemented multiple exchange rates.

“Argentina’s fundamental problems are still there,” said Alberto Rojas, senior economist for emerging markets at Credit Suisse Group AG.

Nonetheless, benchmark dollar bonds due in 2030 added 1.6 cent to 31.6 cents on the dollar as of 11.12am in New York on Monday.

With repayments to the IMF due by the end of June, his economic team is rushing to land an agreement that could extend the deadline. As candidate and minister, Massa may have more leverage to get more money up front from the IMF by shifting currency policy in a more sensible direction.

“As a presidential candidate, Massa may gain some extra support from his friends in the Biden administration, hence some more leverage in dealing with the IMF,” says Héctor Torres, a former IMF board director who represented Argentina.

While investors shouldn’t expect Massa to suddenly pivot toward more pro-market policies, his status as the Peronist frontrunner boosts his leverage in negotiations with the IMF and Argentina’s powerful labour unions, businesses and other key economic sectors, according to Martín Rapetti, director of consulting firm Equilibra.

“It’s not the same for any of these actors to negotiate with a minister that they know in four months won’t have any power versus a minister that could become the next president,” Rapetti said. “Massa’s ability to coordinate and negotiate as a minister today has strengthened significantly.”