On a recent visit to Argentina, I was interested to see how things have changed under the leadership of a new administration—in many cases, due to constructive policy reforms. Work still remains to be done to address challenges, and the path forward may be a little bumpy at times, but the progress we have seen has been encouraging so far. Here, my Argentina-based colleague Santiago Petri and I weigh in.
Executive Chairman, Templeton Emerging Markets Group
President Mauricio Macri has instituted a number of changes, including the removal of currency controls on the Argentinian peso, tax reforms, revisions to how inflation statistics are calculated, new central bank appointments—and perhaps most importantly, settling with foreign creditors on long-ago defaulted debt.
In my view, decisive and intelligent decisions have generally marked President Macri’s first year. A particularly positive development has been the tax amnesty law. And recently, ratings agency Standard & Poor’s upgraded the country’s long-term credit rating, citing progress in rectifying several macroeconomic imbalances, which is encouraging.
Running the Numbers
Argentina’s economic growth has been very spotty and volatile over the years. In the past 10 years, Argentina’s economy has experienced four years of shrinkage: 2009, 2012, 2014 and 2016. But, there have also been some nice rebounds, with gross-domestic-product growth (GDP) surging 10% in 2010 and 2.5% in 2015. After 2016’s contraction, this year GDP growth is expected to recover to 2.7% amid President Macri’s new growth-oriented policies.1
Meanwhile, inflation has been trending higher over the past decade, running below 10% in 2007–2009 but then spiking to around 40% in 2016. Former President Cristina Fernández de Kirchner and her administration were accused of tampering with inflation statistics to hide the detrimental impact of big spending programs and an ever-increasing fiscal deficit the central bank had financed through currency printing. The administration attacked the National Statistics Institute, which reports consumer price index (CPI) data, and fired statisticians presenting data viewed as negative or unsupportive.
Upon taking office, the new Macri administration immediately normalized the Statistics Institute so that Argentina now has a more reliable instrument to track inflation performance. Macri gave the central bank total autonomy, and the monetary authority seems to be making progress in taming inflation.
Reducing inflation temporarily from dramatically high levels is a relatively easier task than bringing inflation down to a more sustainable, long-term, single-digit range. This is currently the central bank’s main challenge. Inflation is expected to decelerate this year to about 22%, but the government still views that as too high.
In 2016, poor economic conditions caused Argentina’s unemployment rate to shoot up to slightly above 9%, but it is expected to fall to about 8.5% this year.2
Argentina’s stock market has generally underperformed the MSCI Emerging Markets Index over the past 10 years, but with the new government, there has been improvement. In 2016, Argentina’s Merval Index surged more than 40% and is up nearly 30% year-to-date.3
Valuations of Argentine stocks have begun to come up from a price-earnings (P/E) ratio of about three times earnings in 2012 to about 12 times earnings in 2016.4 This is still lower than the peak achieved in 2007, when the Argentine market was selling at an average P/E ratio of 24.
Like many other emerging-market currencies, the value of the Argentine peso per US dollar has declined. In 2012, one US dollar could purchase about 4.3 Argentine pesos; today, one US dollar can purchase 15.4 pesos.5
Down to Business
During our visit to Buenos Aires, my colleagues and I had a meeting with a leading Latin American e-commerce company. They said the potential in countries including Mexico and others in Latin America looks great because of the increasing penetration of the Internet. In particular, smart phones are gradually becoming ubiquitous around the world and allow retailing companies to reach more customers.
At one of the Argentine banks, we discussed the impact of Argentina’s high inflation rate. The bank’s loan growth had been running at about 35%, but when the inflation rate is subtracted from that, real growth is only about 15%. Currently the spread between their cost of funds and their lending is wide, aiding the bank’s profitability. Like other major banks in Argentina, profitability has been good. They said they are moving ahead aggressively on digital banking and paying particular attention to the younger generations (below the age of 27) in order to build a clientele for the future.
At an Argentine oilfield pipe manufacturer, we learned that after a disastrous few years when oil prices crashed and the demand for pipes used in the oil and gas drilling plummeted, things were beginning to look up and demand for pipe was recovering. The company has global operations and is a testament to the technical, managerial and entrepreneurial abilities of the Argentinians. A leader in high-quality oilfield pipe, the company also has factories in other parts of the world where their oil-drilling clients operate. We marveled at the fortunate timing of a new plant the company built when oil prices were low and going lower; now that oil prices have recovered, the outlook has improved.
At a large steel company, our discussion focused on tremendous excess capacity in China, and the closure of a number of steel mills there. In addition to operations in Argentina, the firm also has facilities in other Latin American countries. The company officials mentioned that labor costs in Mexico were much lower than in Brazil and Argentina. We discussed the new US administration and potential policies that would restrict imports and what impact this would have on their business—which could actually be positive in some scenarios.
In 2001, Argentina defaulted on more than US $90 billion of its external debt and, refusing to negotiate with creditors, the prior Argentine president left the country’s ability to access bond markets in a holding pattern. In 2016, following the Macri Administration’s renewed efforts to pursue an agreement, Argentina was able to return to the capital markets with a bond sale deemed hugely successful. In January 2017, the government raised money through a number of different debt instruments.
In addition, the government launched a tax amnesty program to give relief to Argentinians who had declared their offshore assets but had not paid taxes on them. As a result of the tax amnesty for those overseas holdings, a total of US $116,800 million was declared, representing about 20% of Argentina’s GDP. The total assets declared were made up of 17% (US $20.5 billion) real estate; 29% (US $33.6 billion) financial accounts; 29% (US $55.9 billion) investments; and 6% (US $6.8 billion) other. Of the assets declared, 80% were held overseas and 20% were held domestically.6 The tax collection related to the tax amnesty was 1.8% of GDP.
We think this is a very encouraging development, as we expect that local investors could potentially allocate much of their now on-shore assets to local securities, providing a boost for Argentina’s economy.
Senior Vice President, Senior Executive Director
Templeton Emerging Markets Group
When Argentina’s new administration took office, it inherited a legacy of macroeconomic and microeconomic imbalances and distortions alongside a deterioration in the institutional framework.
From a macroeconomic perspective, the economy was relying on unsustainable levels of domestic consumption for growth amid increasing fiscal deficits