By Claudia Calich, Head of Emerging Markets Debt at M&G Investments’ Public Fixed Income

Following his victory in Argentina’s presidential elections, Javier Milei will be sworn in as President on 10th December. Argentina’s stocks and bonds seem to be boosted by the election results, but there is plenty to be monitored by markets in the coming weeks as Milei soon stated that there is no room for gradualism going forward.

Milei won 56% of the vote versus 44% for his nearest rival, Sergio Massa, and with there being a legal requirement to vote in Argentina, with the majority of the eligible population expected to do so, the scale of the victory provides Milei with a strong mandate from the public and signals a turning point in the political landscape in Argentina.

His opponent, Massa, is the current Minister of Economy and announced he would be staying on in his role until Milei formally takes power.

In the near-term, it will be important to assess a number of factors whilst the full impact of the result is felt by the market. In the longer-term there is even more uncertainty, but we would expected more details and clarification on how Milei plans to move forward over the next few days and weeks.

Milei’s choice of cabinet is an issue to monitor in the short-term, with Milei stating that he will not announce his cabinet until the inauguration. A highly important selection is that of the Minister of Economy who will be tasked with reforming an economy that is under significant pressure from runaway inflation, a devaluing currency, and an economy on the brink of a recession. Of the potential names touted so far, the majority are market friendly and would be expected to implement policies that are more pragmatic than disruptive.

Fiscal, and economic, policies would also require some refinement as would the political stance of Milei. Milei’s candidacy run was based off disruption and pointed towards a political party that would implement significant changes including dollarization and cutting ties with their closest trading partner, Brazil. However, some of this posturing is expected to be dialled down as there will be significant barriers in implementing these. Dollarization, in particular, will be one policy that will be difficult to achieve in the near term and one that has very little in the way of precedence; whilst Ecuador did so in January 2000, it serves as a reminder that dollarization doesn’t make a country immune to economic issues. It would, however, remove the ongoing pressure faced by the Argentinian peso and alleviate the current runaway inflation. Furthermore, the country would need robust fiscal discipline to be able to credibly maintain a dollarisation policy and to even be in a position to implement it would require a period of reform and stability.

One of the main barriers to implement policies, regardless of unorthodoxy, is that of congressional support. Milei’s La Libertad Avanza party holds 38 out of 257 lower house seats and seven of 72 in senate. Union por la Patria has the most seats in both the lower house and senate, but this is the party of the current president, Cristina Kirchner, and Massa. Without the support required, it will be difficult in implementing some of Milei’s more unorthodox policies.

Market reaction

Whilst the initial market reaction to the result has been positive, bonds are still pricing in a restructuring. At these levels, markets seem to be still quite sceptical about a prompt change of economic policy. If that were to be implemented, bonds should rally further. What markets don’t seem to be pricing in is a scenario where Argentina were to renege on the current IMF deal or default on its external debt. This may be the first test in the short-term in seeing how serious Milei is in reforming Argentina in the long-term.