Argentina’s Best IMF Program Ever? Market Seems To Think So.

ForbesThe International Monetary Fund is the Eye of Sauron over Argentina feared, hated and despised throughout all the land. It tracks every move made in the Casa Rosada in Buenos Aires. Next year is make or break for this debt-wracked, crisis-prone nation.

Either foreign investors refuse to believe that Cristina Kirchner (or someone like her) returns to power in next year’s election, or President Mauricio Macri pulls off the equivalent of a World Cup upset and delivers the greatest IMF program Argentina has ever seen.

The equity market is not the way to guage investor sentiment on Argentina. The Global X MSCI Argentina (ARGT) exchange traded fund is down 32.8% this year, two times worse than the MSCI Emerging Markets Index.

The best way, if not the only way, is through bonds and the peso. The peso started the year off at 18 to the dollar. It hit the 20s when rumors were swirling in May about a pending IMF arrangement, and the central bank made a number of missteps on inflation, forcing interest rates over 40%. (They are now at 60%!)

The market panicked: Argentina was broke for the umpteenth time. Then when the negotiations began and it became more clear just how close to the brink Argentina was, the peso went to 41.28 on September 28, its weakest level in over five years. The good news is it’s now under 40. Forty pesos is a psychological hair trigger for the peso. Over that, and investors are basically giving Macri a no-confidence vote.

For now, Macri definitely has the confidence of foreign investors. They are holders of short-term debt and believe he delivers on his promise to reform the Argentine economy.

James Barrineau, co-head of emerging markets debt for Schroders in New York, says their funds are overweight Argentina. With a bond yield of around 45% short term, in pesos, they feel they are being paid for the risk. Dollar bonds pay 9% for three to four years.

Plus, Cristina needs more than the traditional Che Guevera T-shirt-wearing left to vote her back into power. She needs other members of Peronist movement parties to support her. She is currently under investigation for corruption. She polls neck-in-neck with Macri, given margins of error. Other members of Macri’s Cambiemos party, namely Maria Eugenia Vidal, poll better than both. So in a worst-case scenario, if the opposition believes Cristina is the only one who can beat the IMF and Macri, there is a chance Macri cedes to Vidal, in a “break glass” type of emergency. This seems to be what the market is betting on; the survival of Cambiemos, or a Carlos Menem Peronist to come up from behind.

“Argentina is making progress,” says Barrineau, who likes the fact that the central bank and IMF are in agreement against flooding the market with pesos. Less pesos in circulation helps keep the currency in check. Also, “There is room to cut interest rates,” he says. Real rates are around 19% accounting for 40.5% inflation.

Policy continuity and the reelection of Macri on October 27, 2019 is the main tailwind in a country facing fragile medium-term-debt dynamics that require a primary fiscal surplus, and economic growth. How an economy grows with real interest rates in the high teens is anybody’s guess. Argentina’s economy is largely dollarized, so dollar industries like real estate, commodity producers and some services (think travel industry) may be able to weather this.

“We are overweight Argentina,” says Louis Lau, director of investments for Brandes Investment Partners in San Diego. Lau notes that his overweight is against a benchmark where Argentina is not yet a member: the MSCI Emerging Markets. If all goes well, Argentina joins that benchmark in June. “If you go into commodity companies there then you’re not exposed to the peso as much.”

Add Phillip Torres, global co-head of emerging markets at Aegon Asset Management in Chicago to the list of Argentina bulls in the U.S. Torres is overweight Argentine corporate, sovereign and even riskier provincial bonds. He thinks Macri beats the IMF deadline on various fiscal measures.

“The market will react favorably to that,” he says. “We have been moving around a lot of positions in Argentina over the last four months because pricing got so distorted and there was lots of volatility. It allowed us to move in and out of those securities. We’ll continue to do that,” he says. “My peers on the Street are going to move bond prices in ways I disagree with. Good. I’ll pick up extra spread when it works for me.”

Macri does not have all year to make this work.

The long election campaign season will pit anti-IMF politicians against Macri. No one hates the IMF more than an Argentinian.

There is also the ongoing Notebooks Scandal. Once centered solely around Cristina, it has now moved to other people, including those in Macri’s orbit.

There are still a lot of positive and negative surprises to come in Argentina. Macri could benefit as his rejection rate has peaked and the opposition has not rallied around Cristina. Investors are betting on increasing support for Cambiemos, but only if the economy stabilizes.

“Fortune has landed on Macri’s lap because the IMF is all-in with them, and he made it look like he is creating all the moves to fix the economy, not the IMF,” says Jan Dehn, head of research for the Ashmore Group in London. “It was smart politically. But Macri should have done all these measures when he was first elected. He is two years behind. Can Macri meet his fiscal targets to warrant such tight spreads?” he says about the difference between Argentine bonds and 10-year Treasury yields. “I don’t know the answer to that question. I do know that I am not an overweight.”

If the global mood sours in 2019 and it’s risk-off for emerging markets, Argentina will have a harder time raising capital outside of the IMF. That will not be a good political setting for Macri.

“Expectations play a central role in any financial markets, but particularly in Argentina. We are ending the year with bad indicators in the real economy and country risk pricing a CC credit rating,” says Fernando Pertini, partner and CIO for Millenia Costa Rica.

All three rating agencies have Argentina facing a potential downgrade from its B-level credit.

Pertini thinks foreign investors are too bullish.

“Who is going to invest in Argentina in this environment?” he asks, about local and international companies dealing with the prospect of a deepening political crisis there. Economics and politics in Argentina are closely linked. It’s always the number one issue for voters.

“Macri will be remembered as the government that once again over-indebted the country, which derailed inflation and put us back under the tutelage of the IMF,” says Pertini, who is Argentinian. “That is something we believed to be an economic landscape to which Argentina would never return.”


MarketsI write about business and investing in emerging markets.