Markets are learning to look beyond the noise in Argentina’s presidential campaign.
Three months before elections, the opposition’s Mauricio Macri has gone from promising to lift exchange controls on day one to saying this would be an act of “magic,” and he’s also now saying he’ll leave nationalized companies under state management. Daniel Scioli, the ruling Victory Front alliance’s candidate, has flipped between saying he’d make gradual changes in the current economic model and saying he supports it.
“The market corked campaign bottles too early on the belief that Macri was running away with it, then became overly bearish on the belief that Scioli would represent no change at all,” said Patrick Esteruelas, a senior sovereign analyst at Emso Partners, which manages $2 billion of debt.
Argentina’s benchmark dollar-denominated local-law bonds due 2024 have swung from 108 cents on the dollar when Macri was in the lead to 94 cents after Scioli tapped one of President Cristina Fernandez de Kirchner’s closest aides for his running mate. The notes traded at 98 cents on Monday.
Argentines vote on Oct. 25 in the first election since 2003 that won’t include the president or her late husband, Nestor Kirchner. A run-off will be held Nov. 22 if no candidate gets 45 percent of the vote or more than 40 percent with at least a 10-percentage-point advantage.
Investors had anticipated the winner would change economic policies to attract investment, make the peso more competitive and narrow the budget deficit. The peso was little changed Tuesday at 9.1265 per dollar as of 1:20 p.m. in New York.
Now that presumption is in doubt since front-runner Scioli’s running-mate announcement and his praise of Economy Minister Axel Kicillof, who helped lead Argentina into default by refusing to meet creditor demands.
Scioli’s track record and what he’s told investors in private show his plans aren’t too different from Macri’s, according to Diego Ferro, co-chief investment officer at Greylock Capital Management in New York. While the pace of change may differ, both candidates’ promises are essentially the same, he said.
“I don’t know whether when they talk to investors they tell the truth, but definitely when they talk to their voters, they say things that don’t truly reflect what they plan to do,” Ferro added.
Scioli had 36.9 percent support in a June poll carried out by Management & Fit, compared with 31.6 percent for Macri, an increase of 4 percentage point from May. The nationwide survey of 2,400 people had a margin of error of 2 percentage points. Macri was leading in polls during the first quarter.
Expectations that a new government will be able or willing to implement swift and substantial change are overly optimistic, Mauro Roca, an economist at Goldman Sachs Group Inc., said in a report published July 13. The market is underestimating the complexity of reaching a settlement with holdout creditors, which prevents Argentina from borrowing in global capital markets, he wrote.
With reserves rising 24 percent to $33.8 billion since November, “the next administration will still have some maneuvering room to continue postponing the resolution, if it chooses to do so,” Roca wrote. “For the time being, political –- rather than economic –- considerations may continue to prevail.”
Investors shouldn’t always take comments from the candidates at face value, said Emso’s Esteruelas. Macri has already said enough to indicate he will make changes. Scioli, who is catering to his party’s base support, probably won’t show his true colors until elected, Esteruelas said.
“For as long as we’re in the electoral campaign, the motto is: ‘Don’t read their lips,’” he said.