Markets expressed concern following Peronism’s surprising landslide victory in Buenos Aires. Currently, President Javier Milei is confronted with a multitude of economic challenges as the national elections in October approach. The opposition secured victory by 13 percentage points, a significantly broader margin than anticipated. The exchange rate and country risk index experienced a significant increase the following day, whereas bonds and stocks declined sharply. Markets are calculating the implications, and if the administration continues to deplete its dollar reserves, it will face challenges in meeting its forthcoming maturities. “The extent of the defeat was unexpected. “This is reflected in the pressure on the exchange rate, which today is once again the most sensitive indicator of local risk,” stated Pablo Lazzati.
“The expectation is that exchange rate volatility will remain elevated following the opposition’s victory.” In April, following the acquisition of a US$20 billion loan from the International Monetary Fund, the government permitted the peso to float freely within two bands. The Central Bank is permitted to sell dollars to uphold the peso’s value exclusively when the exchange rate reaches the upper threshold, presently situated at approximately AR$1,470. Last week, the Finance Secretary declared that the Treasury would commence interventions in the exchange market following the depreciation of the peso relative to the dollar, despite the fact that the U.S. dollar had not yet hit the upper limit of the established band. The market assessment indicates that the Treasury possesses merely US$1.1 billion. A report by consultancy 1816 consultancy indicated that the treasury is confronted with maturities amounting to US$1.1 billion prior to the national midterm elections on October 26, suggesting it possesses “extremely limited” capacity to continue engaging in the market. Should the exchange rate reach the upper band, the Central Bank may intervene with as much as US$20 billion. Argentina’s economy is experiencing a slowdown.
The report indicated that the impact of the devaluation on prices, referred to as pass-through, during July and August has been “very moderate,” with inflation recorded at 1.9% in both months. Analysts indicated that the economic slowdown is concurrently restraining inflation. According to the latest available data, Argentina is not experiencing a recession; however, growth has been diminishing following a rebound in mid-2024. Official numbers indicate that quarterly growth registered at 3.9% in the third quarter of 2024, followed by 2% in the fourth quarter, and a further decline to 0.8% in the first quarter of 2025. However, as liquidity diminishes, the market remains notably unsettled. Pablo Repetto stated to the Herald that the administration ought to reconsider the structure of the exchange rate and monetary system. “What concerns the market is that the monetary exchange rate system was already battered and bruised, in need of correction,” he said. “Speculation existed regarding the timing of this event post-October elections; however, the reality is that the election’s impact proved to be significantly more severe than anticipated, indicating that a reset may be required in the near term.” However, Milei stated that the government would “not budge a millimeter” in its economic program in response to the results.
The 1816 report indicated that, given Buenos Aires governor Axel Kicillof was “the big winner” in the elections, the market could “factor in a high probability of a return to power for left-wing Peronism.” It may also allocate probabilities to the potential emergence of a third alternative, more closely associated with the centrist governors. The administration has labeled the apprehension surrounding a potential resurgence of Kirchnerism as “the Kuka risk,” a derogatory term for the advocates of this political movement. Repetto argues that the risk in question would have been significantly diminished had the government not “made so many unforced errors from the second quarter until last week.” A scandal involving kickbacks for disability medicines contracts has shaken the government in the lead-up to the provincial vote. The entity has encountered a succession of legislative setbacks within Congress.
“The significance of Peronism in Buenos Aires province should not astonish anyone,” he added. On Wednesday, the government successfully navigated its initial significant post-electoral challenge, as evidenced by the latest bond auction concluding with a 91.4% rollover rate. AR$7.4 trillion were maturing, while AR$6.6 trillion were renewed, accompanied by a decline in interest rates. In earlier attempts, the administration had markedly raised the rates and banks’ reserve requirements, thereby further constraining economic activity.