Argentine capital outflow accelerates! Milei admits "the market is in a state of panic"

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After a critical defeat in a local election, Argentine President Milei has rarely admitted that the country's financial markets are in a crisis.

According to the latest media reports, last Friday night, Milei admitted in an interview with local journalists, "The markets are in a state of panic."

His previous political setback had already sparked deep concerns in the market about the sustainability of his reform agenda, leading to accelerated capital outflows and turmoil in financial markets. Milei's latest statement has further intensified market tensions, with investors worried that Milei might abandon defense of the peso, resulting in its exchange rate plummeting in a "free fall."

Over the past month, the Argentine peso has depreciated by more than 10% against the US dollar, and it has plummeted more than 34% over the past year.

Argentine bonds and stocks have also fallen across the board, with the pace of capital outflows accelerating noticeably.

Reserves in Peril, Defending the Peso Is Costly

To support the peso's exchange rate, the Argentine government is depleting its already scarce foreign exchange reserves at a "crazy speed."

Derek Holt, Head of Capital Markets Economics at Scotiabank Canada, wrote in a report that the Argentine central bank intervened with $1.1 billion in just three days. For a country whose liquid foreign exchange reserves are estimated by economists at less than $20 billion, this is a shocking figure.

Milei is "burning through reserves at a crazy speed to support the free-fallingpeso." Holt warned that forcibly maintaining the current exchange rate could return the country to the risk of hyperinflation, which would undermine the core of Milei's reforms.

Despite the high cost, the Argentine government seems determined. Economy Minister Luis Caputo stated in a podcast last Thursday night: "We will use the last dollar to defend the (exchange rate band) ceiling."

Argentine Financial Markets Fall Across the Board

Against a backdrop of growing political uncertainty, the prices of all types of Argentine assets have dropped significantly. According to reports, investors are withdrawing capital from the country at a rapidly increasing pace, putting obvious pressure on the bond and stock markets.

This forms a sharp contrast with the early days of Milei's administration. At the end of 2023, after this libertarian economist came to power, his deep spending cuts and sweeping reforms were welcomed by global investors, sending the country’s financial markets soaring. Inflation once fell from above 100%, earning Milei brief support.

Christine Reed, portfolio manager for emerging market local currency debt at New York’s Ninety One, said: “It may be too soon to say this story is falling apart, but all the information we received over the past week has been negative. The outlook before the midterm elections has significantly deteriorated.”

Political Headwinds, Reform Agenda Faces Obstacles

The root of shaken market confidence lies in the strong political headwinds Milei's tightening agenda has encountered. In recent days, Milei's opponents in the House of Deputies increased their pushback, overturning his two controversial vetoes on education and healthcare spending.

It is widely believed that the Senate is even more hostile to Milei’s government, meaning higher spending bills are likely to pass. These political setbacks foreshadow even more difficulties for Milei during the remainder of his term, directly leading to further declines in the country’s asset prices.

In addition, the victory of the leftist Peronist opposition in the crucial province of Buenos Aires has also unsettled investors. According to a previous article, Milei’s Liberty Advances party received only 34% of the votes in the Buenos Aires provincial election, trailing the leftist "Peronist" party by 13 percentage points, far exceeding the market’s previous expectations of a narrow defeat.

Bleak Outlook, Market Expectations Turn Pessimistic

With growing political uncertainty, market expectations for Argentina are shifting rapidly toward pessimism.

Gramercy Funds Management predicted in a research report last Friday that foreign exchange and asset prices are expected to remain volatile until just before the nationwide midterm election vote on October 26. The report noted: “The challenging political backdrop and its short-term impact on the macroeconomic landscape increase the likelihood that (Argentina) will hold a debt operation next year.”

Confronting the difficulties, Milei stated that his government is already developing strategies for next year’s debt repayments, and hinted that he may be negotiating financial aid with an overseas institution, but said he would not make any announcements before confirmation.

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