How is it that the victory of a pro-market candidate caused markets to fall?
How is it that the victory of a pro-market candidate caused markets to fall?
O n Monday, Argentines woke up to shocking news: Javier Milei, a libertarian presidential candidate who, among other promises, has pledged to dollarize the country’s faltering economy, won 30 percent of the total vote and surpassed all other candidates in a key primary held before the general election in October. That morning, markets opened in panic mode and local ADRs saw declines of up to 14 percent, before making a partial comeback. On the same day, the government devalued the national currency by 22 percent, and in just two days, the unofficial exchange rate rose from 600 to 780 pesos per dollar.
So, what happened? How is it that the victory of a pro-market candidate caused markets to fall? First, Javier Milei’s victory was unexpected. Pollsters placed him at 15 to 20 percent, well behind both the candidates of the current Peronist government and the centrist, anti-populist Juntos por el Cambio coalition, which governed from 2015 to 2019. But second, and most importantly, Milei’s program is a long, long way from the Argentinian norm: From eliminating the Central Bank to cutting the number of ministries by more than half, his libertarian proposals go far beyond any typically imaginable reforms in Argentina.
To the political and financial establishment, Milei’s economic proposals seem infeasible, particularly when it comes to dollarization. How can a country with negative net reserves dollarize without setting an impossibly high currency rate and massively impoverishing the population? Faced with this problem, Milei’s chief economic adviser Carlos Rodríguez has said dollarization can only happen within a two-year time frame, and that dollars held by the public could come back into the financial system if a new government applies market-friendly measures, which would soften the blow. (Argentines possess about 200 billion dollars in cash, or about 10 percent of all cash dollars in the world.) Rodríguez also claims restructuring debt issued in pesos will be possible if a new government shows “good will.”
Critics also point to the consequences of dollarizing; i.e., of eliminating the peso altogether and recognizing U.S. currency as legal tender. For example, the question of how Argentina could protect itself against capital outflows remains open. (Some still remember the 1990s, when the peso was pegged to the dollar. Back then, outflows reflected lack of confidence that this arrangement would hold, and that the peso was fundamentally overvalued, assumptions which proved correct.) But the Milei team is not thinking through this issue yet: Millei views dollarization as a drastic but necessary response to a chronic problem that has once again turned acute. Indeed, for decades, the country’s economy has (with only brief exceptions) suffered from inflation, including episodes during which it has hit three and even four figures. With the rapidly accelerating inflation rate (it is now around 116 percent), falling reserves, and political uncertainty on the rise, the situation is deteriorating on a daily basis, so their only priority is how to stabilize quickly and effectively.
Besides the dollarization issue, others fear that Milei may not be able to pass his libertarian agenda in Congress, for which there will also be elections this fall. (Currently, his party holds a handful of seats.) Even if he were to win the presidential election, neither his parties nor any allies will have a majority. In all likelihood, Milei’s coalition will not even be the largest minority. Relaxing labor legislation, for example, is bound to cause Argentina’s powerful unions (which are mostly Peronist and/or left-wing) to cause major difficulties. Likewise, eliminating export and import taxes would significantly affect businesses which have adapted to a closed economy to survive. Any reforms Milei wants to implement will face significant opposition.
But future scenarios will depend on electoral outcomes, which — despite Milei’s initial upset — are not definitive. The libertarian candidate will first need to keep his 30 percent in October, when the first ballot is set to take place. Milei’s victory has already triggered a “fear campaign,” with government ministers saying there will be “blood” on his hands if he follows his electoral promises. Controversial stances on social issues (such as his opposition to abortion, which is legal in Argentina) also threaten to cause an uproar.
If Milei wins first place again in October, the next question would be whether there will be a run-off. If Milei does not get over 45 percent (or 40 percent, followed by a 10-point difference with the runner-up), then he will have to face former Minister of Security Patricia Bullrich or the current Minister of Economy Sergio Massa in a second ballot. If Bullrich is his opponent, he may have to persuade some of the Peronists who supported Massa to switch sides to him, not an easy ask. If he has to face Massa, he will have to secure the support of social democrats and other liberals who voted for Bullrich. Either scenario will mean compromises, and it is unclear how these can be reconciled with the preservation of a platform so far from the thinking of Argentina’s political class.
In any case, the sudden popularity of radical new ideas (which, in part, simply reflect dissatisfaction with the status quo rather than positive enthusiasm for those ideas) coupled with skepticism over their implementation and anxiety over the political instability that it may trigger are not a good combination for markets, which explains the volatility of Argentine bonds and stocks this week. Compared to the 2019 primary, after which Buenos Aires’ MERVAL Index fell by 48 percent, this seems almost calm. But still: The possibility of a Milei win, and the uncertainty of what an administration led by him would look like, is causing everyone to react and stay alert. Fasten your seatbelts: This will be a race (and an economy) worth watching.