Argentina shyly returns to investors' radar: what is behind this unexpected phenomenon

A delegation of 14 senior executives from international investment funds passed through Argentina last week. Convened by Eduardo Tapia, CEO of AR Partners, one of the main local stock exchange companies, they met with economists, officials and opposition leaders. It was practically the first foray by portfolio managers since Alberto Fernández became president. The return of travel converged in this case with an incipient interest that is beginning to emerge on Wall Street more than at present in the political and economic future of the country.

This visit was not an isolated event. In fact, local brokers acknowledge that they are beginning to receive more questions from abroad from banks that want a little more information about the Argentine market. This is not a barrage of queries, but you do notice a change in trend. From a total disregard since Alberto Fernández won the PASO in August 2019 and it meant the return of Kirchnerism to power to a certain curiosity to understand what the prospects are for the future.

What is the logic behind this timid change in perception that is beginning to be noticed in relation to the situation in Argentina? There are several factors that converge, among which the following stand out:

Positive differentiation between emerging countries: the invasion of Russia and Ukraine destroyed the price of shares and particularly bonds of both countries for obvious reasons. But Chinese actions also suffered, for example. The losses to investors were huge and that improved the outlook that the funds have on Latin America. In addition, the positive addition is that the region is rich in food and energy production. In this case, Argentina has a very positive differential, even though the energy balance will complicate the fiscal equation in the coming winter. The evidence of a growing flow that the region began to look at is the revaluation of the Brazilian currency above 15%. The dollar had hit 5.75 at the end of last year but started to fall to almost 5 reais. The local market followed this move closely and the “counted on liquidation” dollar that had touched $230 at the end of January closed Friday at $195. In addition, Argentine bonds recovered after the initial impact they suffered by the war. And stocks were surprisingly a good refuge in this month of extremely high volatility for international markets.

The agreement with the IMF lowered the levels of uncertainty: Until the end of January many investors feared the worst-case scenario, that is, that the government decides to kick the board with the Fund and not reach an agreement. But even with the resistance of hard Kirchnerism, the opposite path was taken. Although markets consider that there is a high probability that the committed fiscal and monetary targets will not be met, it was enough to reassure the foreign exchange front, reducing the chances of a sharp devaluation. It also helped to narrow the gap between the official and financial dollars. In the short term, there will be significant relief as the initial disbursement of the new agreement will be USD 9.8 billion.

A change in the political cycle is beginning to be “sniffed out”: although the road is long, we are already beginning to look more closely at the electoral scenario for 2023. And although anything can happen in Argentina, no one misses the heavy wear of the Government, the weakness of the President and the fact that hard Kirchnerism has been left almost alone voting against the Fund's agreement. It was also a convincing fact that the governors stood up massively with a stance totally opposed to that of Cristina Kirchner. All this points to a scenario of alternation, in which Kirchnerism is likely to end up being a minority force that would seek refuge in the province of Buenos Aires. Will the vice president be able to get another “rabbit out of the galley” as she did when nominating Alberto Fernández as a candidate for President in 2019? Nobody rules it out, but today it appears as a rather remote possibility. The possibility that the opposition will return to power or that a much more moderate Peronism led by central governors as an electoral bet is attractive to investors.

Argentine asset prices remain at auction prices: most shares are still at a fraction of what they were worth after the historic collapse suffered after the PASO in August 2019, with some exceptions such as the case of Pampa Energía. Bonds remain just above USD 30 on average and are already incorporating the scenario of harsh restructuring, including strong capital removal and lengthening terms. But if Argentina achieves a reduction in country risk even without returning to international markets, that catastrophe scenario dissipates. An improvement of the scenario in the future could blow up Argentine bonds. For now, both corporate debt and provincial dollar bonds have much better prices than public securities. There is another factor that could improve the attractiveness of bonds in the short term, since in July they start paying a higher coupon. This will cause many investors to start positioning themselves because semi-annual payments in dollars make a significant leap.

The acceleration of inflation is not something that attracts particular attention among investors. Moreover, they see it as another fact that further erodes the government's voter base. Especially considering that in February the food basket rose by no less than 9%.

March is already played, beyond government pressure to impose maximum prices or subsidize the price of flour, from an increase in withholdings from 31% to 33% on soy derivatives. According to an estimate by economist Fernando Marul, the index will be around 5.2% this month. The increase in food stands out, partly now triggered by the war in Ukraine, also in the same sense the increase in fuels, more prepaid, private schools and the first 20% increase in electricity and gas.

The measures announced by the President, such as the Wheat Stabilizing Fund and the increase in withholdings to finance it, do not bring too much news nor will they be decisive in lowering inflation. During the week there will be new announcements at the same address. The “advantage” is that there may have been a “peak” in March and from April the index will return to levels closer to 4% and then perhaps fall some further step. However, it will be difficult for inflation for the year to fall short of 60%.

Horacio Rodríguez Larreta will be one of the stars of the week that begins, with a scheduled trip to Europe. The planned visits to Germany and Spain are of a communal nature, but they are clearly the first steps abroad in what will be the long race towards the presidential elections of 2023.

The head of government of Buenos Aires had already been to Wall Street at the end of last year, where he had his first “examination” with investors looking for clues about his plans in case of becoming president. While there is still a long way to go, especially in an economy as fragile as Argentina, its main message is that the only way to attack the distortions carried by the economy, and in particular inflation, is through a “shock”. This would imply leaving behind the formula of “gradualism” promoted by Mauricio Macri and which Alberto Fernández is also trying, in both cases with poor results.

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