August 1, 2019 / 2:14 PM / 20 days ago

Six points: Argentine markets watching gap as presidential primaries near

BUENOS AIRES (Reuters) - Argentine voters go to the polls for primary elections next week with market-friendly incumbent Mauricio Macri widely expected to come in behind the populist-leaning opposition candidate. The market reaction, economists say, depends how big the margin.

FILE PHOTO: Argentina's President Mauricio Macri attends an event in memory of the victims of the 1994 bombing attack of the Argentine Israeli Mutual Association (AMIA) community centre, marking the 25th anniversary of the attack, at the Casa Rosada Presidential Palace in Buenos Aires, Argentina July 18, 2019. REUTERS/Agustin Marcarian/Pool/File Photo

A survey of 19 economists polled by Reuters indicated that left-leaning Alberto Fernandez’s six-point lead over Macri would spook investors, worried conservative Macri would be unable to overtake his rival in time for general elections in October.

If center-right Macri can stay within two points of his main rival, however, that would support the peso, domestic stocks and bonds, according to the median response from the local and international economists.

Fernandez and his running mate, militant populist ex-President Cristina Fernandez de Kirchner, are less favored by markets, concerned they could usher in more interventionist policies. The two are unrelated.

“If Fernandez wins, the market will suffer volatility given the uncertainty about the economic team and policies,” said Paula Gándara, head of analysis and strategy at Buenos Aires-based financial services firm AdCap Argentina.

Argentines will vote on Aug. 11 in a primary election that, while having little bearing on who will be the main candidates, will give the first major temperature check on an election race that is a test of Macri’s painful economic reforms.

Macri, backed by the International Monetary Fund, has been pushing a tight economic program to rein in debt levels, while hiking interest rates to bolster a weak peso currency that lost half its value against the dollar last year.

Fernandez is a moderate Peronist who has tried to reassure markets he would not intervene heavily in markets.

However, recent comments by Fernandez on bringing down interest rates to help pay pensions, weakening the peso, and attacks on the IMF have rattled some investors.

    CURRENCY OUTLOOK

    A strong showing by Macri would also boost the peso, the poll compiled July 23-26 showed. A Macri win in the first round of elections and a potential ballot would see the peso likely hit 48.5 per dollar ARS=RASL by the end of the year, the median forecast showed.

A Fernandez win would see the currency drop sharply to 60 per dollar, according to the economist polled. The currency closed at 43.9 per dollar on Wednesday.

The country risk index compiled by investment bank JP Morgan (JPM.N) would also diverge depending on the results, ending down at 600 points if Macri were to win or sharply higher at 1,200 points if he were to lose, the economists said.

This would have an impact on the country’s ability to raise funds through debt issuance, making it far more expensive to issue corporate or government bonds.

The vast majority of economists said it was also “unlikely” a Fernandez government would push forward with reforms and fiscal austerity. Macri, however, would likely stay on the path if reelected.

“In an eventual victory, Macri will move forward with the necessary reforms,” ​​said Esteban Domecq, president of Invecq Economic Consultant, adding it was unlikely markets would trust Fernandez to do the same.

FILE PHOTO: Argentina's presidential candidate Alberto Fernandez waves before a meeting with students and teachers at Faculty of Exact and Natural Sciences, University of Buenos Aires, in Buenos Aires, Argentina July 31, 2019. REUTERS/Agustin Marcarian/File Photo

Siobhan Morden, managing director of Amherst Pierpont Securities, added some would be watching the key race for Buenos Aires governor between incumbent María Eugenia Vidal, a key Macri ally, and former economy minister Axel Kicillof.

The real hit to markets though would be if Fernandez received 45% of all of the votes cast in the primaries - an amount that would allow him to take the presidency in the first round in October and avoid a run-off.

“Vidal has to do well and Fernandez-Fernandez can’t get 45% (of the vote), or the markets will fall,” Morden said.

Reporting by Gabriel Burin; Additional reporting by Walter Bianchi in Buenos Aires, Rodrigo Campos in New York; Editing by Adam Jourdan and Steve Orlofsky

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