Analysis-Argentina investors on edge as Milei decides who to put in economic hot seat

By Jorgelina do Rosario

BUENOS AIRES (Reuters) -Argentina’s libertarian President-elect Javier Milei must appoint a head of a central bank he previously pledged to burn down and task a minister with overseeing one of the world’s most pressured economies. Investors are watching closely.

Milei’s chosen team will shape policy in South America’s No. 2 economy in the years to come as the outsider contends with inflation above 140%, net reserves in the red and myriad capital controls. The country, in which four-in-10 people live in poverty, is also the International Monetary Fund’s largest debtor.

Although Milei is surrounded by a small group of economic advisers, the recent tie-up with the mainstream conservative bloc that helped him win a second round of voting will likely see horse-trading over the top jobs.

A stronger-than-expected win with 56% of the vote could embolden Milei, who has pledged to quickly end capital controls, slash government spending and eventually dollarize the economy.

“Milei received a strong mandate to change the current economic model,” said Armando Armenta, analyst for Latin American fixed-income and currency markets at AllianceBernstein in New York.

“Who is appointed…as central bank president and economy minister, and the details of an urgent economic stabilization plan without a majority in Congress, will be the key for asset prices in the days ahead.”

The Economy Ministry is always a hot seat, with Argentina a nine-time debt defaulter caught in a decades-long boom-and-bust cycle. Still, the major grain exporter is facing one of its worst economic crisis, with a recession around the corner.

Milei will take office on Dec. 10 after beating ruling Peronist coalition Economy Minister Sergio Massa.

Hans Humes, chief investment officer at Greylock Capital Management, which holds Argentine sovereign bonds, backed Milei to pull off more than people expected.

“A lot of people don’t think dollarization is workable. I think he will do it, it will take a bit of work,” said Humes. “I expect (his) team has been formed already.

THE UNCERTAINTY AHEAD

Milei, whose surprise win in the August primary vote roiled markets, counts former deputy economy minister Carlos Rodriguez, ex-central bank chief Roque Fernandez and Dario Epstein, head of a financial services firm, among his economic advisers.

Emilio Ocampo, who worked on Wall Street for more than two decades, has become his top dollarization advisor.

But Milei’s recent backing by business magnate and former conservative President Mauricio Macri could add some market-friendly names to the cabinet from his PRO party and the Together for Change (JxC) coalition.

Juan Manuel Pazos, chief economist at TPCG in Buenos Aires, said Milei’s first post-election speech on Sunday had set the “right tone” and carried the “right message”, aiming to broaden the coalition as he confirmed an alliance with the PRO.

“Milei said that he is going to reorganize the central bank instead of imploding it or shutting it down. That detail is important,” Pazos said, adding that Argentina’s sovereign bonds should perform well on Milei’s stronger-than-expected victory.

The country’s overseas dollar bonds, which largely trade deep in distressed territory, rallied more than two cents to just above 30 cents on the dollar, before moderating gains to up one cent, according to MarketAxess data.

The new economy minister will have to negotiate a new programme with the IMF “relatively quickly” to avoid entering arrears with the fund, Morgan Stanley said on Monday. The country has a $44 billion programme with the Washington-based lender that was agreed in early 2022 to refinance a failed 2018 loan.

“The two sides can argue for a new start and put behind the current policies that threw the current program off track,” according to Morgan Stanley´s note.

Massa, who only got more votes than Milei in Buenos Aires, Santiago del Estero and Formosa provinces, said on Sunday that it was Milei’s responsibility to provide certainty “starting tomorrow”.

“And we expect him to do so,” he added.

Argentina’s local markets are closed on Monday due to a national holiday.

(Reporting by Jorgelina do Rosario; Editing by Adam Jourdan and Kirsten Donovan)