(14 AUGUST 2019) DAILY MARKET BRIEF 2：Argentine peso in free fall as populist Peronist party wins primary elections

Things are looking really bad for the third largest Latin American economy. Investors look highly concerned about the surprising results from mandatory primary elections held on 10 - 11 October, which gave reason to candidate Alberto Fernández, member of Cristina Fernàndez de Kirchner Peronist party, Partido Justicialista (PJ), by an astonishing 48% of total votes while pro-business outgoing President Mauricio Macri Party, Propuesta Republicana, only gathered 33% of the votes. Although primary elections are more of a nationwide poll ahead of upcoming election taking place in 27 October and therefore have no direct impact on the final results, it seems that the rise of the PJ, known for its stricter state control, has become a sure thing. The reaction was not long in coming on financial markets as the argentine peso, Buenos Aires Merval index and Argentina treasuries declined by respectively 17%, 38% and over 31%.

Facing a deep recession and an inflation of over 55% in the country, the Argentine central bank (BCRA) took the decision to hike its LELIQ rate to an all-time high of 74.85% (prior: 63.70%) and intervened on the FX market, selling a total of $255 million of its own reserves in an attempt to stabilize the currency. In this backdrop, the BCRA is expected to maintain ultra-tight monetary policy in place as inflation largely overshoots target bands of 12% - 17% set in 2017 and target of 5% for 2019. Meanwhile, Argentina’s GDP figure slightly improved in 1Q, declining by -5.80% (4Q 2018: -6.10%), and should show slight improvement in 2Q. Yet uncertainties surrounding forthcoming elections will keep investors on their toes as a resurgence of populism would necessarily worsen the situation in the country, as price inflation is expected to take off in the second half of the year while economic growth should continue to decline under current circumstances.

By Vincent Mivelaz