Argentine markets hit as capital controls imposed

Peso weakens against dollar

BUENOS AIRES, Sept 2, (RTRS): Argentina’s international bonds fell to record lows on Monday and peso got slapped down again after President Mauricio Macri imposed capital controls on Sunday after announcing the government would “re-profile” its debt by extending maturities.

The about-face by Macri, a free-markets advocate who started his administration by reversing the heavy-handed protectionist policies of his predecessor, Cristina Fernandez de Kirchner, came after the government failed to stem heavy investment outflows and to shore up its tumbling currency.

The peso weakened 0.8% to 60 per dollar, while in the black market the currency fell 1.56% to 64 to the greenback.

“The dollar at this level is now strong enough,” Treasury Minister Hernan Lacunza told a news conference. “All these measures have the central objective of stability.”

The official peso had lost more than 23% since the Aug. 11 primary election turned the country’s politics on its head, with business-friendly incumbent Macri getting soundly thrashed by his populist-leaning opponent Alberto Fernandez.

Fernandez is now the clear front-runner ahead of the Oct. 27 general election. His vice presidential running mate is previous president Kirchner, a free-spending populist who applied heavyhanded trade and currency controls during her two terms.

Changes

Having announced changes to Argentina’s bond payment scheduled last week, the application of currency controls was the second measure by Macri that flew in the face of his own promise to use orthodox policies to straighten out the chronically-troubled economy. Some of the new interventionist policies may be difficult to back out of later, analysts said.

“The problem with restrictive, emergency measures is that they are easier to apply than to retract,” said Buenos Aires-based financial analyst Christian Buteler in a tweet.

More peso weakness was expected ahead. “The game has changed for the foreign exchange market,” said Sabrina Corujo, an analyst with Buenos Aires brokerage Portfolio Personal, warning that local stocks and bonds were set to weaken as well.

The central bank has been authorized to restrict purchases of dollars as it burns through its reserves to prop up the peso. Investors fretted that once the controls are in place, they will be difficult to end, possibly leaving Argentina with an economy once again distorted by government intervention.

The reintroduction of controls was a sharp turnaround for Macri, a free-trade advocate who won the presidency in 2015 on promises of “normalizing” Latin America’s No. 3 economy by ditching the controls favored by the previous administration.

Argentina’s benchmark international 2028 dollar bonds dropped more than 2 cents to a new low of 36.5 cents, according to Refinitiv data. Bonds maturing in 2038 recorded similar losses.

Losses

Argentina’s euro-denominated sovereign bonds also suffered hefty losses to hit record lows on Monday. The 2022 bond dropped more than 10 cents to 34.45 cents while the 2027 issue tumbled 7.2 cents to 33.501 cents, according to Refinitiv data.

American depository receipts (ADRs) of Argentina’s financial institutions also came under pressure. Grupo Financiero Galicia’s Frankfurt-listing tumbled 9.15% while Banco Macro SA fell 6.5%.

Monday was an official holiday in the United States, which could help control losses in Argentine asset prices by reducing trading volumes, Buteler tweeted.

The risk premiums demanded by investors to hold Argentina’s dollar bonds over safe-haven US Treasuries rocketed to 2,534 basis points on J.P. Morgan’s index of hard-currency emerging market bonds - levels last seen in the wake of a major 2001 default.

“(Capital controls are) a sign of distress in the market and reflect that the new parameters on Argentina are weak and when the peso weakens further it weighs on the credit profile,” said Michael Bolliger, head of asset allocation for emerging markets at UBS Wealth Management.

“There remains a lot of pressure on the currency ... There’s a limit to what they can do without capital controls.”

The peso has lost more than a third of its value year-to-date, following a more than 50% drop last year. The central bank has burned through nearly $1 billion in reserves since Wednesday but failed to stem the peso’s slide.

“The key is to watch how the local market reacts today,” said Graham Stock at BlueBay Asset Management. “Will it reassure locals that their dollar deposits are safe or will it lead to attempts to get around the controls?”