Argentina has a rightly deserved reputation as a perennial economic basket case, but that doesn’t mean the malaise will continue.
Indeed, it seems things might be turning the corner, and some investors are starting to get excited. A recent report from Brown Brothers Harriman says there has been a “significant increase recently” from clients about onshore investments in Argentina.
That may come as a surprise because the country hasn’t exactly been an economic bright spot, either historically or recently.
Bad history. Argentina has suffered many economic problems. Perhaps, top of the list should be its dealings with creditors.
“This country has a uniquely complicated track record of debt repayments,” says Todd Martinez, director of Latin American sovereign ratings at Fitch Ratings in New York. “We don’t rate administrations, we rate sovereigns, so it takes a little time for us to build confidence that responsible policy making is a permanent feature of Argentina.”
Argentina won’t get a cast-iron credit rating until it has more of a robust track record on how it manages its money and debts.
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Another issue is that the country has been mired in what amounts to 1970s-style stagflation (stagnation and inflation). Data for last year shows the country in recession and the consumer price index for Buenos Aires, was at 41 percent in January — down from 44.8 percent in the previous month.
Why are investors queuing up to plop money in the country? The government of President Mauricio Macri is instituting a series of economic reforms that promise a far better outlook for the economy — and for investors.
Better government. Until recently, Argentina has followed what amounts to a statist, or semi-centrally planned, system. Wrenching the economy out of such a structure is bound to be painful because such reforms historically have always been so.
“One of the anxieties was if Macri’s popularity fell,” says Win Thin, global head of emerging market currency strategy at BBH. The concern was a looming mid-term election scheduled for this fall. Fortunately, those worries have abated.
“Poll numbers and economics are both going the right way,” Thin says. “It means he’ll continue with his reforms,” such as the reduction of government subsidies. If Macri was less popular, he may be inclined to keep subsidies in place to boost his poll numbers, despite of the negative impact on Argentina’s economy.
In addition, the government found another way to rake in more cash. “A tax amnesty has helped government revenues,” says Nicolas Jaquier, economist for emerging market debt at Standard Life Investments in London.
That amnesty brought cash into the government coffers allowing it to spend on capital projects, Jaquier says.
The amnesty also helped the financial sector, as cash got deposited in bank accounts.
“One of the things holding back growth in Argentina has been low credit penetration,” Martinez says. That means cash savings haven’t been recycled into lending by financial institutions. “Looking forward, low private leverage and macro policy corrections could help turn the financial sector into a more relevant growth engine.”
The availability of bank loans and other credit is one of the major planks of a market economy. Without it, economic growth will be stymied. The hope is clear: Increased deposits and hence greater capacity to lend will unleash a credit-led investment boom.
Good news. As a result of all these reforms, investors are getting excited.
“We’ve heard a lot of announcements of foreign direct investment in Argentina, but the execution has been slower, perhaps reflecting a wait-and-see approach, Martinez says. “But it could gain speed in the coming year.”
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Foreign direct investment includes such activities as buying local companies or building new factories. It differs from investing in the local stock market or purchasing local currency bonds. It is considered very important to growth as it a lot stickier than financial market investments. It’s a lot harder to sell a factory than it is to dump stocks and bonds, as a result foreign investment stays in the country a lot longer.
BBH is optimistic about Argentina, saying the economy will likely start expanding this year, with growth expected to hover around 3 percent for the next few years, citing estimates from the International Monetary Fund. That compares to an annualized decline of 3.8 percent in the third quarter of 2016, according to TradingEconomics.com.
Investors who are interested in taking the plunge into Argentina might want to consider the Global X MSCI Argentina exchange-traded fund (ticker: ARGT), which tracks the MSCI All Argentina 25/50 Index. It has annual expenses of 0.74 percent, or $74 per $10,000 invested.
A word of caution — ARGT lacks the diversification of many ETFs, and holds only 25 stocks scattered throughout the consumer, materials and financial sectors. More than half the fund is held by five stocks, including e-commerce firm MercadoLibre ( MELI, 18.8 percent) and steel producer Tenaris ( TS, 17.2 percent).
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The fund has gained more than 40 percent over the 12 months versus approximately 19 percent for the Standard & Poor’s 500 index.
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The Time Might Be Right to Invest in Argentina originally appeared on usnews.com
