I first set foot in Argentina in 1998, and I stayed for eight months. Many of the things I noticed about Argentina in 1998 were still true until very recently: a moribund economy; an overvalued exchange rate; weak state institutions; and a cult of presidency. And as before, Argentina recently voted for change. This time, however, the change was borne of will rather than necessity; of hope rather than of crisis. Indeed, the mistakes of Argentina’s past seemingly prevented it from making a similar gambit again.
In the Argentine collective psyche, the inability to comply or to make good has become a caricature of the national identity. Argentines live in dread of their national decline, but they also embrace the fatalism of the “falluto” — a word in the local dialect that simultaneously means hypocrite and failure. After experiencing decades of dictatorship, populism and cleptocracy, the people and the economy have evolved to make do, with little room for ideology or doctrinism. Better to be “falluto” than poor.
It is ironic, but not at all illogical, that Argentina today is, in our opinion, one of the few positive stories in the emerging market (EM) universe. Its protracted debt saga effectively shut it off from international markets over the past decade, preventing the build up of US dollar denominated debt that has become the scourge of so many other countries. The very fact of Argentina’s exile from global markets over the past decade necessitated its salutary deleveraging. Its self-imposed autarky rendered it all but immune to the sudden stops of capital flows and the global push-pull of China. Its monetarist stimulus created a unique set of imbalances totally uncorrelated with the global cycle. It is a country of high human capital, broad natural resource wealth, and stunning places and landscapes. These are the reasons why Argentina can show such strength just as the rest of EM founders. Argentina’s “falluto” has become its savior.
Exhibit 1: Changes in the level (as a percentage of GDP) of Argentinian public sector debt for the period from 1992 to 2014 with the IMF’s forecasts for 2016 through 2022
The lack of debt and positive story have allowed for Argentina’s grandiose coming out in markets on 19 April 2016, with the largest new bond issue in the history of emerging market debt. Should investors go in? How will the new issue perform? We are positive on the launch, for three reasons.
One, the debt looks fairly priced to cheap on a quality-adjusted basis, assuming positive ratings momentum as the country normalises its position in the global financial system.
Two, the country stands independent of broader market risk and in particular China, which arguably remains the predominant macro factor in the asset class — thus this is a rare opportunity to add uncorrelated high yield.
Three, any policy slippage regarding risk of going off the rails is distant; President Macri has enormous political capital, at home and abroad, and a generous honeymoon with which to implement the list of common sense reforms that should support economic opening and growth. [divider] [/divider]
This article was written in London on 19 April 2016.
Image source: Alfonso Prat-Gay, Argentinian Minister of the Economy. http://www.economia.gob.ar/prensa/