2024-02-23 13:33:09
Argentina’s battered markets are showing signs of beginning to believe that ultraliberal leader Javier Milei can lead the local economy out of the crisis, although the challenges are multiplying everywhere.
In the midst of a painful crisis and with a government without money, the president has made austerity a key focus since taking office in December, which led in January to the first monthly fiscal surplus of the country in more than a decade, something like music to investors’ ears after years of excessive spending.
His program has not helped him make many friends among provincial governors or unions and triggered social protests, but it has captivated investors, taking some sovereign bonds to four-year highs and reducing the country risk index to a minimum since 2022.
“It seems that the market is beginning to believe” the Government, said Mariano Sardans, manager of the FDI fund management company, adding that if it prospers with the implementation of its policy, a strengthening of the devalued peso would allow it to eliminate the strict exchange controls that They limit access to the dollar.
Milei, who made the bold promise to erase almost 3% of last year’s fiscal deficit, has tried to make up for his word quickly.
His Government has abruptly cut spending, repurchased debt, accumulated an absorption of more than US$7 billion in favor of the central bank’s depleted reserves and renewed import debts with a successful issuance of ‘Bopreal’ bonds.
For now, this reinforces the market’s belief that Milei will deliver on its promises to stabilize the economy, although it will not be an easy task with studies suggesting that poverty has increased to 60% and social discontent is evident in the streets in the face of an abrupt reduction in purchasing power.
Argentine markets double their bet on Milei while investors begin to believe
“The market is becoming very optimistic regarding Javier Milei’s conviction. In fact, it is a true regime change worth celebrating, given that most investors did not trust its ability to reduce the deficit just a few weeks ago,” said Javier Casabal, fixed income strategist at Adcap Grupo Financiero.
Some dollar bonds are at their highest level in four years, others are approaching two-year highs, although they are still trading in thorny territory of 35 to 45 cents on the dollar, while the JP.Morgan bank’s country risk index It moves at its lowest level since May 2022.
However, the South American country’s debt remains very risky, as Argentina has defaulted on its commitments nine times, most recently in 2020, before a major restructuring.
Milei’s economy faces urgent solutions with serious obstacles and setbacks, while the macro has been favored by the improvement in trade, with a trade surplus in the last two consecutive months thanks, in part, to greater grain production after after last year’s harvest was affected by a historic drought.
Meanwhile, measures to absorb pesos into the market, through short-term Treasury bill tenders, have strengthened the currency and narrowed the gap between the controlled official exchange rate and popular parallel markets where dollars are more expensive. .
This produced a recent strengthening in peso futures – a sign of where investors believe the currency is headed – indicating a drop in expectations of a sharp devaluation on the horizon after a brutal 54% correction in December. , shortly after Milei took office.
Argentine markets double their bet on Milei while investors begin to believe
The June futures contract still places the peso at around 1,060 per dollar, compared to the current spot exchange rate of 838.4 units, although below previous predictions of more than 1,400 pesos.
The Milei Government, in ongoing conversations with the International Monetary Fund (IMF) about the US$44 billion loan program to the country, publicly assured that it will promote tougher measures than those the organization itself is seeking to put the country’s finances in order. State.
Mauro Mazza, an analyst at Bull Market Brokers in Buenos Aires, said the positive boost from the fiscal balance could help Argentine debt earn ratings upgrades, although probably not enough to lift them out of their current ‘No’ status. trash’.
“The local debt continues to consolidate the fiscal expectations of the first quarter, that is why we work with certainty that the financial surplus will continue in February and will probably strengthen in March, so we can have fiscal numbers between April and June that are so good that the rating upgrade of Argentine bonds is almost a fact,” Mazza asserted.
This scenario makes analysts project a value towards 50% parity in the short segment of local debt.
A source at an Argentina-based rating agency, who responded on condition of anonymity, said it was still too early to discuss the grade updates.
“It would be imprudent to refer to a possible improvement in grade, although it is logical that we monitor the Argentine situation,” he concluded.
Argentina leads the world inflation ranking with a drag of more than 250% annually.
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