Result of Argentine primary elections could reverse Macri´s pro-market policies

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Andressa Tezine (Fidelity) | The sharp fall in Argentina´s bonds and international shares, after President Macri´s surprise defeat in Argentine primary elections, could spread to other Latin American and emerging markets while investors look to re-balance their positions.

But opportunities could also arise in other emerging markets, trapped in an indiscriminate sell-off. Meanwhile we can expect a reversal of Macri´s pro-market policies of the opposition wins power in October.

Populist wave

President Macri has lost the Argentine primary elections, by a larger margin than expected, to the populist opposition candidate Alberto Fernandez and his colleague (and ex-president) Cristina Fernandez de Kirchner. These elections are normally a good indicator for the result of the general elections, which will take place on 27 October.

Macri secured 32% of the vote while Fernandez got 47%. Macri had introduced austerity measures to stabilise the besieged Argentine economy, but Sunday´s vote has sent a clear message that those policies are not accepted by the voters. With a difference of almost 15 points, the chances of Macri defeating Fernandez in the general elections seem minimal.

Argentina is in a recession and the peso has lost half its value against the dollar in the last year. The country has one of the highest inflation rates in the world, although its has fallen recently, having reached a high of 57.3% in May. Markets had been expecting that Macri´s pro-market would encourage domestic investment in Argentine. However, these results suggest that the country could return to policies like currency and capital controls, debt restructuring and the increase in subsidies.

Market reaction

Markets have anticipated the Fernandez victory with a fall in bonds in dollars of 17-20 percentage points. The Argentine peso fell in Monday´s opening by around 30% and at the moment of writing is trading at around 59 pesos per dollar, while the central bank is not intervening to support the currency. Therefore we expect the yield curve for interest rates for sovereign dollar bonds to remain inverted, given that the markets are strongly positioned in Argentina in dollar bonds.

The role of the IMF in the event of Fernandez government will also be the object of close scrutiny, given that such a government is likely to go to the IMF to restructure the country´s debt. This would happen only shortly after Macri negotiated the largest rescue in IMF history (57 billion dollars), conditioned on austerity measures.

We expect markets to focus on when and how a potential Fernandez-Kirchner government would announce new controversial measures to reverse Macri´s reforms. Independently from the timing of the official announcements, the markets will discount this in prices before the 27 October elections. As a consequence, investors should pay attention to political developments over the next few months and consider if they can bear the associated risks. If concerns about Argentina extend to emerging markets in general, it could create opportunities for agile investors in countries not connected to this electoral process or the final result.