Don’t Cry for Argentina, Change Is Here
In the early 20th century, Argentina was ranked as one of the 10 richest countries in the world. People used the phrase “rich like Argentina” to describe the fabulously wealthy. It was the future.
Then a combination of factors made the country come crashing down – including military dictatorships, the populism that was Peronism, various inept rulers, and the recently ousted socialist President Cristina Fernandez.
No one factor stands out. As author and Harvard economist Rafael Di Tella told the Economist, “If a guy has been hit by 700,000 bullets, it’s hard to work out which one of them killed him.”
Today, Argentina is ranked 107th on Transparency International’s list measuring public corruption. And that’s just the tip of the iceberg.
But cry no more for Argentina…
New Leadership Holds Promise
The election of the center-right candidate Mauricio Macri holds much promise for Argentina.
And investors took notice. Argentina’s stock index, the Merval, soared 40% from the start of October alone, anticipating his victory.
The gain in bond prices was even more spectacular. Yields on Argentine 10-year bonds fell to just 2.25% from 9%!
Well-known investors from George Soros to Daniel Loeb have been piling into the Argentine markets.
Macri, who will take office on December 10, is already off to a good start. He’s forming a strong economic team, led by former central bank chief Alfonso Prat-Gay.
Prat-Gay was considered a “magician” early in the last decade when he oversaw a huge drop in inflation, from 40% to 5%.
Prat-Gay and Macri will certainly need to work magic. Outgoing President Fernandez is leaving them with what might politely be called an economic disaster.
Inflation is near 20%, the country’s foreign reserves have dwindled to almost nothing, there are capital controls, the exchange rate of the Argentine peso is overvalued, and the central bank is printing money like mad to fund the fiscal deficit, which runs at 7% of GDP.
And that’s not including the public corruption and populist policies like energy subsidies.
The head of the central bank – Alejandro Vanoli – initially refused to resign. The Fernandez holdover said Macri’s policies would be wrong for Argentina. That’s according to the man who ran Argentina’s reserves down to just $25 billion, with rumors that it may be as low as a mere $1 billion.
Macri’s First Move
So what will President Macri do once he’s in office?
First on his agenda will be the removal of capital controls and the unification of the currency.
While the official exchange rate is 9.6 pesos to the dollar, the real market rate is about 14.5 pesos to the dollar. Macri’s currency unification will be a de facto devaluation of the peso.
Macri has also pledged to reduce or remove export taxes and restrictions on Argentina’s vast grain output. That news alone helped push soybean prices down near seven-year lows. The country is the No. 3 exporter of soybeans and No. 1 exporter of soymeal, which is used in animal feed.
He’ll also likely try to reduce the overly generous subsidies for energy, among others, that are raising the government’s debt burden.
Finally, he’ll try to settle the dispute between Argentina and disgruntled bond creditors (due to non-payment by Argentina).
This will be key. If a settlement is reached, Argentina will finally be able to return to the international markets for capital and sell sovereign bonds. The country had been shut out of these markets since 2001.
So how can investors play this vast change in Argentina?
This is a tough call. Argentine stocks have started sliding again as recession fears creep in. Macri’s hard medicine, though needed, will exact a price.
My colleague Martin Hutchinson gave some suggestions in his article. I can’t argue with any of them.
The only sector I would add is something in the banking sector. In November, Moody’s upgraded Argentina’s financial institutions from negative to stable.
Of the three, I would choose Banco Francés. Its history dates back to 1886, and it’s 76% owned by Spanish banking giant Banco Bilbao Vizcaya Argentaria S.A. (BBVA).
These stocks will benefit if President Mauricio Macri can work some magic and get Argentina back on its feet.