South America has been a special part of my life for four decades. I have lived many years in Brasil and Peru. I am married to an incredible lady from Argentina. I want to share South America with you.
Few countries have so dramatically spurned international investors only to woo them back again as assiduously as Argentina is doing. The next important milestone for President Mauricio Macri, whose election victory last year triggered intense interest from investors, will come if — as expected — the International Monetary Fund next month lifts an unprecedented censure it slapped on the previous populist administration in 2013 for fiddling statistics.
How did Argentina manage to win back investors so quickly?
In a word, credibility. Mr Macri, a former businessman, appreciates the importance of regaining market confidence. Indeed, reform of the state-run Indec statistics institute is one of the pillars of this trust-building strategy. When the Indec announced last month that poverty levels were at 32.2 per cent of the population, compared to the previous administration’s claims last year of 5 per cent, many observers who value the truth (perhaps perversely) saw this as good news.
Transparency has also returned to economic policymaking. The central bank adopted an inflation-targeting regime last month, setting a target next year for 12-17 per cent which is broadly seen as credible; and many celebrated when the finance ministry presented a budget to congress with realistic assumptions for growth and inflation for the first time in many years. The fact that the government last month opened up its books to the IMF for (elsewhere routine) Article IV consultations, after the multilateral lender was unceremoniously booted out of the country a decade ago, is a measure of just how much has changed.
So what’s the problem?
Argentina’s economic recovery — from an admittedly tricky situation — is taking longer than some were hoping. And there are concerns that it is “more noise than reality”, in the words of one Wall Street banker. The government’s most successful achievements so far have been in the financial markets — where Mr Macri’s banker-heavy administration is at its most competent — like removing capital controls and exiting default by resolving a long-running debt dispute.
But now more structural issues, such as Argentina’s vast and inefficient public sector, are coming to the fore. This will require immense political skill to untangle, from a government largely composed of technocrats. For now, in an attempt to maintain governability during a complicated transition process, the main casualty is the fiscal deficit. The concern is that deficits have always been at the root of Argentina’s endemic economic crises — and that there will always be a new excuse not to fix it.
Why are markets so tolerant?
Investors know they are unlikely any time soon to see another government in Argentina that is more to their liking than the capable and market-friendly team that Mr Macri has assembled. So they are willing to give them a chance. For many, it is understandable that the government is throwing money at its problems — after all, a faster recovery brought about by “shock treatment” is not much use if social unrest before the results set in threatens Mr Macri’s hold on power. (It wouldn’t be the first time that a government fell foul of popular protests in Argentina.)
In effect, foreign investors are financing the transition process, as the governmentissues record levels of debt to plug the fiscal deficit. The consensus is that Mr Macri has about another year — until midterm legislative elections in October 2017 — to prove that he is worthy of investors’ trust. Most importantly, the economy needs to have picked up sufficiently by then in order to ensure enough support to perform well in the elections, which will provide a clear indication of whether Mr Macri’s reformist project has a future.
When will the results start to show?
Inflation has already begun to slow. In a sign of confidence that it will continue to decline, and that the currency will remain stable, foreign investors have been piling into fixed-rate peso-denominated debt to take advantage of the “carry trade”, with the government aggressively issuing $8.5bn of 5, 7 and 10-year peso bonds in the past two weeks.
Most economists agree the recession hit rock bottom in the third quarter, and a rebound is under way, even if 2016 as a whole will show a contraction of about 2 per cent. But if growth in 2017 disappoints, that will be bad news for the government’s attempt to keep the fiscal deficit under control — and investors may start to lose their patience.
Investors are also keenly watching the results of a tax amnesty, which closes in March. If Argentines bring enough money back into the country — the government is conservatively hoping for $30bn, but others expect much more — that could trigger the levels of foreign direct investment the economy needs to really take off.