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Investors anxious over new Argentine president’s next move

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Via Financial Times

Investors breathed a sigh of relief at Alberto Fernández’s narrower-than-expected victory in Argentina’s presidential elections, but were anxious for more clarity over the leftist leader’s first moves when he takes power on December 10.

While financial markets took heart that Mr Fernández failed to win a majority in congress, restraining his ability to push through controversial laws, the precise direction that his economic policy will take remains unclear given his refusal to unveil a cabinet — instead naming a transition team of economic advisers with divergent views.

With reserves falling by almost $4bn in the week before the elections — prompting the central bank to tighten up capital controls on Sunday night — restoring confidence with investors is crucial, said Diana Amoa, a fixed income portfolio manager at JPMorgan Asset Management.

“One way to do that is to appoint a more credible cabinet and show a willingness to engage debt holders and the IMF,” she added.

Indeed, top of the list of the new government’s priorities will be to reach a swift deal with the IMF — which is likely to demand continued austerity despite Mr Fernández’s campaign promises to increase public spending — in order to pave the way for an agreement with private creditors to stave off Argentina’s ninth sovereign debt default.

“The economic team needs to be announced as soon as possible. That is what we as investors will be looking at,” said Eddy Sternberg, a portfolio manager for emerging markets debt at Loomis Sayles. There are also worries that some of the transition team might be rejected by the market.

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Argentina’s century bond tumbled on Monday, down almost 4.5 per cent to 40 cents on the dollar. Another dollar bond due to mature in 2028 fell 4 per cent to 39 cents on the dollar.

“[Mr Fernández] faces daunting challenges. He needs to come out with a clear strategy to deal with the issues that Argentina faces and to actually regain some confidence from markets,” said Federico Kaune, head of emerging markets fixed income at UBS Global Asset Management. “The situation is really, really grim as it is.”

Even so, observers were heartened by an unexpectedly strong performance by the centre-right coalition of the incumbent president, Mauricio Macri, after its disastrous performance in August primaries, which narrowed the Peronist’s lead by half from 16 points to just 8 points on Sunday.

That means that the new centre-right opposition will control the largest block in the lower house of congress, with 119 deputies out of 257, compared to 109 for the Peronist bloc, potentially enabling it to block legislation. Nevertheless, Mr Fernández will have just enough senators to achieve a quorum, with 37 loyal to his coalition, while the opposition will have just 28.

“This was not a bad result,” said Mr Sternberg. “We don’t have the uncertainty of a second round and what would happen in between, and the population has voiced its concerns about a typical Peronist government.”

Ms Amoa added: “Given that [Mr Macri’s coalition] is still a significant part of the country’s leadership . . . there is a vested interest for both sides to try to steer things towards a smooth transition, It is not in anyone’s interests to exacerbate the tension in the economy or exacerbate the economic fragility.”

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