In anticipation of the new president's promised economic downturn treatment, investors largely remained cautious on Argentina's financial markets on Monday as local stocks rose to herald the beginning of the Javier Milei era.
Following a controlled devaluation implemented months ago, the official peso, on which part of the market focuses on amid requests for a reset, declined. The price of dollar bonds inched lower even though spreads tightened slightly.
The majority of stocks were up; the local stock market increased by nearly 4% to a new high, while the offshore market saw a 0.2% gain.
Milei took office on Sunday, and in his first speech as president, 53-year-old Milei warned that the only way to solve the nation's "titanic" problems was through a severe and painful fiscal shock.
Regarding his economic plans, Milei's speech was somewhat vague, but he did stress that the state, not the private sector, would bear the burden of a fiscal adjustment equal to 5% of GDP in the form of spending cuts.
According to a government spokesman, Luis Caputo, the newly appointed economy minister, will present the main policies on Tuesday.
The team is looking at a number of issues, including direct contracts with universities, government payroll, and contract revisions from all ministries, according to the first cabinet meeting.
With hyperinflation and an economic downturn on the horizon, as well as completely depleted government reserves, the task of implementing drastic cuts to public spending appears daunting.
Bomb of debt
Argentina, a serial defaulter, has to pay more than $4 billion to creditors in the private sector and the International Monetary Fund by the end of January. According to JPMorgan, its total debt payments for 2024 will be $90 billion and $25 billion in local currency and foreign currency, respectively.
Ratings firm Fitch maintained its position on Monday, stating that it is more probable than not that there will be a reorganization or other type of default event in the upcoming years.
That scenario, however, some argue, is priced in, with dollar bond prices still remaining below 40 cents following a weeks-long increase.
Unsteady markets
The MSCI Argentina index rose 0.24%, while all foreign-traded stocks marginally increased. The local Merval benchmark in pesos achieved 3.7% growth, reaching a new all- time high.
Although it is still officially under the leadership of the departing team, Argentina's central bank announced on Monday that it would limit transactions on the currency market and prioritize high-priority transactions within the "transition" period while new guidelines and bank leadership were announced.
The central bank is awaiting Santiago Bausili's official takeover in place of Miguel Pesce. According to a bank representative, that requires the signing and publication of a presidential decree in an official bulletin on Tuesday.
The peso on the black market increased marginally to 980 a dollar.
With a significant devaluation decision, the central bank weakened the official rate of the peso by 0.55% to 366.10 a dollar on Monday, in accordance with a controlled devaluation for months.
Graham Stock from BlueBay Asset Management predicted that the rate would eventually drop to about 650 to the dollar, whereas Morgan Stanley analysts projected that it would rise to 700 a dollar following a series of the latest local press reports.
Stock stated that Milei's inaugural speech served purely as a show and that he now needs to focus on the grunt work of government.
In a press conference, presidential spokesman Manuel Adorni revealed that the government's actions will involve a significant reduction in fiscal outlays along with some increase in social spending. This reflects the difficulty Milei will have in averting social unrest.