Beyond the Presidential Election in Argentina

Dear Client,

The libertarian candidate Javier Milei obtained a categorical victory in last Sunday's runoff election with 55.7% of the vote, versus Economy Minister Sergio Massa's 44.3%, and will be sworn in as president on 10 December. At the same time, he became the most voted candidate in history and with the biggest difference over his contender since the return to democracy. This event is of both national and international relevance. Some things that explain his solid victory were a significant increase in turnout, which rose from 69% to 76%, and the support of former President Macri and the PRO candidate Patricia Bullrich, fundamental to overturning the result of the October elections.

The country has the chance to become a regional energy power, considering the potential for exploiting the Vaca Muerta oil and gas field, whose reserves available for extraction are 20 times oil reserves prior to its discovery, and the prospects of strong crude oil prices. At the same time, lithium production, in a country with the third-largest reserves in the world, would contribute to diversifying the Argentina’s energy matrix and complement its agricultural potential. Implementation of an economic stabilization plan and making the necessary economic adjustments will require generating social and political consensus and will be a condition for unlocking the country’s future value potential.

From a regional perspective, Milei’s victory joins a list of other Latin American elections marking the receding “red tide” in Latin America and the regional left. They include President Daniel Noboa's election in Ecuador and the categorical electoral defeat of Colombian President Gustavo Petro's candidates in regional elections, where he lost 29 of 32 gubernatorial races. Regarding regional relations, Milei will seek to forge ties with Presidents Luis Lacalle Pou and Santiago Peña of Uruguay and Paraguay, respectively, in addition to Noboa.

There are other favorable factors for the region, such as the strength of institutions – the Argentine elections took place in an orderly fashion and the defeated candidate took only a few hours to recognize the results – and in a world where geopolitical risks have been on the rise, Latin America is looking like a safe place. Considering the strong performance of Latin American assets in recent months, it could boost the risk appetite.

Returning to the election, the new president will face a challenging economic scenario that deteriorated remarkably in the last two months due to Massa’s squandering of economic resources, increasing public spending by close to 1% of GDP to boost his electoral performance. At the same time, the repressed exchange market, Central Bank reserves in the red and heavy commercial debt in foreign currency, runaway inflation and record poverty will require a plan without halfway measures that allows regaining confidence. Access to the market will not be easy without a clear idea of this plan, which is relevant considering debt maturities in 2024, with significant IMF and global bond payments in January.

On the other hand, the president-elect’s proposals point to a free market approach. Regarding economic policy, the campaign focused on a major cutback in public spending, dollarization, closing the Central Bank and significant reduction in the size of the state, as well as privatization of public companies such as YPF. Moving forward, he will have to moderate these proposals if he is to reach consensus and has already sent promising signals on this front. In his speech, he highlighted that his government will have three principles: 1) reducing the size of the state, 2) focusing on international integration and free trade and 3) fulfillment of campaign promises. His speech was conciliatory toward other political forces, and he left the door open for all those who wish to join the government to do so regardless of where they came from, as long as they stick to these ideas. Regarding his team, several members of the PRO, led by Macri and Bullrich, are expected to join the administration. Reaching consensus in Congress will be challenging and should force Milei to moderate his ideas to obtain centrist votes, including among members of Juntos por el Cambio, as not all of them supported the president-elect. However, the Argentine system is strongly centered on the presidency and many measures can be taken without going through the legislature.

We can expect markets to remain volatile going forward, with the outlook still uncertain. At the sectoral level, banks face significant risks should dollarization be implemented or in the face of any monetary adjustment, as most of their assets are in the form of peso-denominated Central Bank debt. On the other hand, companies focused on exports, especially in the Oil & Gas sector, have operational strengths to be able to lead successful strategies in the future. Similarly, less regulation would especially benefit utilities.

In relation to our Latam funds, within the corporate debt we maintain marginally overweight versus the benchmark, with strong credit quality issuers that have low leverage, natural generators of dollars and ample liquidity, especially in the oil and gas sector (YPF, Pampa and CGC). From the equity perspective, 5% of our portfolio is indirectly exposed to Argentina. We are awaiting greater clarity on the stabilization plan that the new government will propose to assess companies’ capacity to create value for shareholders.

Kind regards,

LarrainVial Asset Management