Argentina's Markets Plunge 6% as Ruling Party Loses Key Election

On September 9, local time, Argentina's stock, bond, and currency markets experienced a significant downturn following the defeat of the ruling party, Freedom Advances, in the Buenos Aires provincial elections. This outcome has raised concerns about the government's ability to push through its economic reform agenda. The President acknowledged the defeat and pledged to conduct a self-assessment of the government's performance over the past two years, but emphasized that the economic direction would not change. The Minister of Economy reiterated that the government's fiscal, monetary, and exchange rate policies would remain unchanged.

The market reaction was swift and severe. Argentina's benchmark stock index plummeted, the peso depreciated by nearly 6% against the dollar, and Argentine stocks traded in the United States also saw significant declines. Some of Argentina's international bonds recorded their largest single-day drop since 2020. The market's optimism about the Buenos Aires provincial election results was deemed overly optimistic, with the foreign exchange market's volatility quickly spreading to the stock and bond markets. The true determinant of Argentina's asset performance will be the nationwide midterm elections on October 26, which is seen as the decisive battle.

In the Buenos Aires provincial elections, the opposition Peronist coalition, the Union for the Homeland, led by 13 percentage points, far exceeding market expectations and pricing. This defeat has cast a shadow over Argentina's market, which has already been under pressure. Notably, Buenos Aires province accounts for nearly 40% of the country's population, making its influence substantial. The defeat was more severe than expected, indicating that the midterm elections in October will be a tough battle. Over the next five weeks, the government is likely to be forced to adjust its political tactics and repair the losses accumulated in recent months.

Since taking office in December 2023, Argentina has been seen as a key narrative in emerging market reforms. However, in the past month, as a core party figure was embroiled in a corruption scandal, market pressure has increased. Since the scandal broke, Argentina's main stock index has fallen by about 20%, international bonds have been continuously sold off, and the peso has come under pressure following the recent cancellation of the fixed exchange rate, forcing authorities to intervene in the foreign exchange market again.

The election results were far worse than market expectations, dealing a heavy blow to the President. Therefore, he must come up with countermeasures. Before the election, it was warned that if the President suffered a "humiliating defeat," international bond prices would plummet. On Monday, the rating of preference for Argentina's sovereign debt was directly withdrawn.

Facing the pressure on the peso, the Minister of Economy urgently called on Sunday: "The floating exchange rate system will not change." However, if the central bank continues to sell dollars, the decline in foreign reserves will raise market concerns, and people may begin to worry that before the midterm elections in October, the government may be forced to allow the peso to depreciate further. However, some strategists pointed out that Buenos Aires province has always been a stronghold of Peronism, and this result may not represent the national trend. The election in Buenos Aires province took place against a backdrop of tightening financial conditions, peso depreciation, rising inflation, and slowing growth momentum, which had a limited impact on the President's policy mix but was indeed a political setback.