Even in the world of financial markets, where speed is measured in milliseconds, the velocity with which Argentina’s economic outlook went from bright to bleak was impressive.
President Mauricio Macri’s market-friendly policies had fuelled investor optimism around the globe, knocking down currency controls and lifting trade barriers. Macri ended Argentina’s decade-long conflict with so-called ‘vulture’ funds, raising the nation out of default and inserting the country once again into the global markets, meaning the State could once again borrow at reasonable rates.
Yet, over the past six months the country’s trajectory has been called into question after an aggressive devaluation coupled with high inflation and a slowdown in growth hit.
Toward the end of last month, the Merval —Argentina’s benchmark stock market index — suffered its worse single day drop in history, falling 8.8 percent. Investors fled Argentine assets even despite an IMF loan worth US$50-billion and the re-entry of the country into the MSCI Emerging Markets index.
Amid such uncertainty, some investors remain bullish.
“Argentina is attractive right now from a valuation perspective,” explained Juan Manuel Pazos, head of investment strategy for Argentine investment bank Puente, in an interview with the Times.
“You had a 55-percent depreciation of the peso with less than 20-percent inflation, so you are looking at a broad recovery in real investment,” Pazos added. “The government is following the IMF’s programme of strict fiscal adjustment and hawkish monetary policy is going forward. This is a very healthy consolidation on the fiscal side. The picture is improving as the peso is no longer overvalued.”
Pazos is optimistic despite the warning calls from some experts suggesting the macroeconomic variables don’t look so good in the short-term, with inflation expected to come in around 30 percent for the year and GDP contraction seen for the next couple of quarters. Still, the peso appears to have found its footing close to 28 pesos to the US dollar and President Mauricio Macri’s administration is taking steps to balance the fiscal budget. Over the medium-tolong-term, the outlook improves.
The bears are out there too.
“Although the Central Bank’s initial signals have been positive, as the government returns to a more orthodox policy path, confidence has been hurt by recent changes, and there’s still uncertainty over the trajectory of monetary policy,” SBS Research group told specialised financial daily El Cronista earlier this week.
FLIGHT TO SAFETY
Uncertainty has been accentuated by a general flight to safety, as investors shed emerging market assets in favour of safer, dollar-denominated securities. The US Federal Reserve has already initiated its policy of raising rates after a decade at the zero-range, which attracts investors to the dollar, while the Donald Trump administration has been locked in a trade war with China, fuelling further flight and wrecking havoc to emerging market currencies and assets.
Financial instability in Argentina has led the risk of default to double too, jumping from 3.73 percent from the beginning of the year to 6.76 percent, according to a report by Federico Furiase, a Finance professor from DiTella University.
A badge of support for the Argentine government, Blackrock – the world’s largest asset manager – is planning to open a sales office in Argentina, Bloomberg reported this week. Yet, many investors remain locked in a wait and see approach, given the situation in domestic debt markets.
“Today, everyone is looking towards ‘SuperTuesday,’ when more than 500 billion pesos worth of Lebacs (Short-term paper denominated in local currency) are set to expire,” Gustavo Ber, an economist for financial consultancy Estudio Ber, told the Ámbito Financiero daily.
Under former Central Bank president Federico Sturzenegger, the stock of Lebac grew and currently stands at some US$1,000,000,000, which were used by the Central Bank to sterilise or absorb pesos, keeping a lid on the domestic currency.
To make the assets attractive, and to battle inflation, interest rates were set at an incredibly high 40 percent, calling into question the sustainability of the strategy. Now, with the Central Bank under the auspices of ex-Finance Minister Luis “Toto” Caputo, the idea is to substitute Lebacs with Letes (which are dollar-denominated, longer in duration and therefore less volatile), yet the 5.5-percent rate on the paper causes similar suspicion regarding sustainability.
Yesterday, the Merval continued to fall, shedding 1.54 percent to 26,499.71 points. It’s gone a long way from the 35,000 hit in early 2018, the Merval’s alltime high. Friday’s was the third consecutive session in the red for the benchmark index that is most definitely in bear territory amid a contractionary monetary policy from the Central Bank.
In the face of heightened volatility, many local companies have sought to protect their shareholders through stock buybacks. Pampa Energia is one such example, having dropped some US$245 million in May to buy shares from companies in its portfolio including Transportadora de Gas del Sur and Edenor. Pampa Energia also used an estimated US$1 million to rebuy 27,000 ADR (American Depository Receipts).
One recent study showed that investment jumped 18 percent in the first quarter of the year, indicating it had become the primary driver of economic growth. However, the AAICI (Argentine Agency of Investment and International Trade) warned that investment would decelerate in the second half of the year, having recessionary effects. The study had looked into the effects of investment before the run on the peso which accelerated in April.
Between January and March, the purchase of production equipment surged 23 percent, followed by growth in construction, at a 12-percent clip.
“In 2017, investment took the lead role in a context of economic expansion and hit high levels of growth in the first quarter of 2018. It will likely decelerate in the second semester as the impact of global markets hits our economy. The exchange rate correction will help exports, in turn attracting investment to exporters,” said Juan Pablo Tripodi, president of the AAICI, to Ámbito Financiero recently.
Another significant risk for investors comes from the political arena, where many are remaining cautious given growing disapproval ratings for Macri and some of his key ministers.
Experts say as the economy contracts, the risk of the current market-friendly administration losing out to the opposition in next year’s presidential elections increases – a potential event that would spook investors for sure. In this way, some 18 months away from the next election, Argentina is once again becoming a “political trade” for some investors. As Macri doubles down on austerity in order to meet the IMF’s fiscal deficit requirements, the ruling Cambiemos (Let’s Change) coalition will see its political continuity threatened as rising unemployment and stubborn inflation test his political base’s resolve.
However, for the moment, most analysts don’t see a potential candidate out there from the Peronist opposition that could beat Macri or Cambiemos at the ballot box, suggesting the current fiscal and monetary path will continue.
And that, for most investors, would be music to their ears.