Wealthy Nations Daily Update - Argentina

Argentina’s current stand-off with creditors in the debt market has removed it from many investors’ radar but an imminent change in leadership as the ongoing Presidential elections run to a second round may start to bridge the way for the country to access the markets again; the market seems to be starting to factor this in with Argentinian debt one of the best performing assets this year.

For the first time in Argentina’s history the Presidential election campaign is due to run into a second round on November 22; the ruling party’s candidate, Daniel Scioli, only secured 36.7% of the votes compared with 34.5% for Mauricio Macri, the opposition Cambiemos coalition candidate.  To win in the first round the leading candidate needs over 45% of the vote or more than 40% with a 10% point lead.  Given what looks to be a close race it will be important which candidate the UNA candidate Sergio Massa, who only gained 21.3% of the vote, endorses.  The extent of the push back from the public was evident as it also extended into the gubernatorial elections where Anibal Fernandez, the ruling party candidate for Buenos Aires, lost to Maria Eugenia Vidal, the Cambiemos candidate: this is the first time a Peronist candidate has lost since 1987.  This is a key seat being not only populous but constituting ~40 percent of Argentina’s GDP.

The new government faces considerable challenges: first, inflation is rampant (private estimates track around 25% per annum); second, foreign exchange reserves have dwindled to around USD 27.7bn; third, the currency is uncompetitive (with the official rate at ~peso 9.50 to the US dollar but the black-market rate closer to peso 16) with foreign exchange controls; fourth, the fiscal deficit that could reach as high as 7 percent of GDP this year (a situation not helped by the Fernandez administration’s penchant for subsidies); fifth, Argentina remains locked out of capital markets due to a bondholder dispute that still needs resolution; sixth, its ‘institutional frameworks’ remain extremely weak; one of the key issues is that Argentina has defied a ruling from the international courts in favour of its creditors on a debt default dispute.

It seems the Argentine public may have tired of the current status quo; to voters Scioli has presented a message of continuity of Cristina Fernandez’s policies with some gradual tweaks and some intention to attempt to renegotiate with its creditors and resolve the debt debacle.  In contrast, Mauricio Macri represents a mandate for change favouring addressing the exchange rate and currency controls, encouraging investment and renegotiating with its creditors.  At the start of the 20th century Argentina was one of the wealthiest nations ranking 10th in terms of GDP per capita, although today it is 55th using the IMF estimates.  However, the international defaults have driven its sovereign rating into the lower realms of junk.  At these levels Argentina is punching well below its weight.

According to our analysis, between 1998 and 2012 no nation with net foreign assets has defaulted on their debt.  In November 2001 Argentina first defaulted on its debt with net foreign liabilities of 39% of GDP.  But Argentina’s default and abandonment of the currency board saw an improvement in the terms of trade: according to Stratton Street estimates, Argentina’s net foreign assets in 2011 were 12.8% of GDP which puts in in our wealthy nations universe alongside countries such as Chile, France, Russia and Sweden.   This is also corroborated by Argentina’s net international investment position for 2014 of +14.2 percent.  However, we select for ‘wealthy nations’ that also have the attributes of an investment grade sovereign at the time of purchase.  Thus, considerable reforms and much improved policy-making will be required to take Argentina back to investment grade and into our investable universe.