The Bases Law, an economic deregulation initiative proposed by Javier Milei to address fiscal deficit, was rejected this Tuesday, causing a stir in the market. The ruling party, with the President away in Israel, lost the vote on the law in the Deputies. The law was withdrawn, and the party accused the governors of “treason.”
Despite Milei’s perceived legislative weakness since his tenure at the Casa Rosada, the market was impacted by this political setback. Argentine assets, including bonds and shares of companies listed on Wall Street, declined. The blue dollar increased by 3.5% to $1,185, while financial dollars also rose: the stock market dollar by 2% to $1,210 and the cash dollar by 1.5% to $1,272.44.
Below are some key points to understand the market’s reaction:
The market is closely monitoring Javier Milei’s governance, which is crucial for implementing proposed reforms. According to consulting firm Aurum Valores, the law’s failure and the subsequent posts from the Office of the President indicate a decision to escalate political tension. They warn that the path ahead seems perilous given the political landscape chosen by society in 2023.
They further argue that in this context of political weakness of the ruling party and fragmentation of the opposition, a wide-ranging willingness to engage in dialogue is necessary to bring about significant changes required by the fragile economy. They caution that failing to understand this fundamental need could lead to a critical economic, social, and political scenario.
Similarly, PPI noted that although significant differences over various points of the law with the opposition were known, the market did not anticipate this outcome. As the market dislikes surprises, they expect a response from Argentine assets. The feasibility of implementing the plan was always a key factor in the market’s perception of La Libertad Avanza.
In recent weeks, Argentine debt has shown resilience and managed to detach from global market fluctuations. Dollar bonds have seen improvements of up to 15% since the beginning of the year.
Despite this, local uncertainty continues to impact bond prices, which remain between US$35 and US$40, far from global comparables. Delphos notes that this setback does not suggest a perfect Argentina, but rather that political disagreements have been largely factored into bond prices.
Country Risk Remains High
The JP Morgan banking indicator has seen marginal improvement since Javier Milei’s government took office, but remains significantly high. The country risk currently hovers around 1,880 units and has not managed to drop below 1,800 points since December 10.
Alignment with Global Markets
The decline in Argentine assets coincides with global market uncertainty fueled by the U.S. Federal Reserve Chairman, Jerome Powell’s, statement that lower interest rates are further off than anticipated by the market.
Delphos notes that in a legislative failure scenario like the current one, global context takes precedence over local events, unless there are significant discrepancies. They explain that the rise in Argentine stocks (adjusted by beta) and sovereign bonds since the end of October can be attributed to a favourable international context of lower global interest rates, a weak dollar, and favourable capital movements to risk assets. This trend began to weaken at the start of the year, but local factors allowed Argentine assets to decouple and cut loose.