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Barclays: Risks Of Disorderly Path To Dollarization Have Increased

ARGENTINA
  • Barclays believe frontrunner Milei looks determined to promote the outcome of Dollarization, as it will make his plans more feasible if he comes to power. At the same time, the current administration continues to deliver expansionary fiscal measures, aggravating an already challenging scenario. In this context, the status quo looks much more benign than what might occur for the peso and local currency assets.
  • At this point, the main barrier to a much more disruptive scenario is that dollarization still requires a huge amount of financing to be implemented. And it is not obvious that Milei would induce hyperinflation in his own government to overcome that obstacle, although there are also good reasons for him to deliver. This makes a non-hyperinflationary scenario also a possible equilibrium, although increasingly less likely as deterioration continues.
  • The pace along this path will depend crucially on Sunday's election. Relative uncertainty about the outcome is also acting as a barrier against further instability. That will be either substantially reduced or eliminated this Sunday. Polls suggest a 35-30-25 scenario, with Milei first and Massa making it to the second round.
  • Barclays expect the discussed dynamics to accelerate if results are as expected (because the anchoring scenario of Bullrich making it to the second round would be completely priced out) and even more intensely if Milei unexpectedly wins in the first round.
  • If, however, Bullrich makes it to the second round or if Massa outperforms expectations so much that his winning the second round becomes realistic, Barclays believe the effect would be the opposite, as a non-dollarization scenario would become more likely.
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