Last weekend's Argentine presidential election brought unexpected results. Javier Milei, who advocates for "dollarization," failed to maintain the lead he had in the early August primaries. Contrary to most polls earlier this month, he did not secure the majority of votes required. Following the announcement of the results, Argentine stocks and bonds took a hit, while the local currency, the peso, strengthened.
The election, which concluded on the evening of the 22nd, did not produce a clear winner as no candidate achieved the required percentage of votes. As a result, Argentina will hold a second round of presidential elections on November 19th.
As of 2 p.m. Beijing time on October 23rd, with over 98% of the votes counted, results showed that the center-left "Homeland Alliance" candidate and current Argentine Minister of Economy, Sergio Massa, led with over 36.6% of the votes. Milei, a congressman from the far-right "Freedom Forward Party," secured about 30%, placing second. Patricia Bullrich, a candidate from the center-right "Together for Change" alliance and former Minister of Security, received approximately 23.8% of the votes, coming in third.
According to the Argentine constitution, a presidential candidate needs to secure over 45% of the votes or achieve over 40% with a lead of 10 percentage points over the second-place candidate to win outright. Otherwise, the top two candidates will face off in a second round, with the one receiving the most votes declared the winner.
Market Reaction to Election Results
Following the announcement of the results, the initial reaction in the financial markets was negative.
Argentine bonds underperformed in emerging market bonds. The country's dollar-denominated bonds, which were trading below $0.30, fell by more than $0.03 after the first round of elections.
The U.S. dollar bonds due in July 2030 saw their largest intraday drop since July of the previous year.
Shares of some Argentine companies listed in the U.S. saw significant declines in early trading.
Milei had previously indicated a desire to re-privatize YPF. Shares of the state-owned oil company YPF SA fell by over 4% in U.S. pre-market trading on Monday, opened down over 5%, and at one point dropped nearly 11.6%. By midday, the decline had narrowed to around 6%.
Grupo Galicia, a major Argentine bank and financial services company, saw its U.S. pre-market shares drop nearly 5%, with an early trading decline of 6.7%. However, by late morning, the shares had rebounded, showing a midday gain of about 2%.
The Global X MSCI Argentina ETF, which invests in a broad range of Argentine securities, dropped over 4.7% in early trading on Monday but narrowed its losses to less than 2% by midday.
After Milei's victory in the August primaries, the official exchange rate of the Argentine peso to the U.S. dollar plummeted 18% to 350. Following the announcement of the election results on Monday, the black market exchange rate for the peso surged 14%, with the dollar trading from 1200 to 1050.
Media outlets noted that Massa's surprising turnaround in this election demonstrates the resilience of Argentina's current ruling coalition. This suggests that the official exchange rate of the peso will not plummet as it did after the August primaries.
Future of Argentina's Economy
Milei's previously announced dollarization plan primarily involves freezing the exchange rate, converting all bank accounts and contracts to dollars at that rate, allowing Argentines to trade in pesos or dollars for a period, and transferring central bank debt to offshore funds.
Analysts have pointed out that a second-round face-off between Milei and Massa would likely trigger a market sell-off. As long as Massa remains in the race, he has an incentive to continue government spending, which could further exacerbate Argentina's already high inflation rate of 138%.
However, even if Milei were to win the election, it's uncertain whether his victory would have a positive impact on Argentine assets.
Before the weekend vote, some analysts predicted that bond prices might surge if Milei won. While Milei primarily proposes abandoning the Argentine peso in favor of the U.S. dollar, many economists believe this move could further exacerbate Argentina's short-term inflation. However, without majority support, the future of Milei's dollarization plan remains uncertain.
A significant question now is whether the Argentine government will allow the peso to depreciate.
Some analysts believe that, given his lead in the first round, Massa might delay any adjustments to the official peso exchange rate. After the August primaries, the official rate depreciated by nearly 20% and was then frozen at 350 pesos to the dollar.
High inflation has already weakened the peso's competitiveness. In terms of the real effective exchange rate, the peso is now nearly 10% stronger than before the August primaries. Argentina might initiate a new round of interest rate hikes in the future. With dwindling U.S. dollar reserves, the government might aim to increase financing costs to reduce demand for the dollar and alleviate pressure on the parallel market.
