A New Era For Argentina by Mark Mobius, Franklin Templeton Investments
My colleagues and I recently visited Argentina, which is undergoing a transformation after last year’s election ousted President Cristina Fernández de Kirchner, the wife of the previous President Nestor Kirchner. The center-right opposition candidate Mauricio Macri’s win with his “Let’s Change” slogan ended a regime that brought high inflation, dollar shortages, an erosion of foreign reserves, and government actions that undermined business confidence and limited access to international capital markets. Taking office in December, President Macri appointed a skilled technocratic team promising to improve the economic situation in the country, which the financial markets have welcomed.
Soon after the new government took office, rating agencies upgraded their outlook for the country from negative to stable as a result of the swift changes from the previous government’s economic policies, including the elimination of currency controls and the reduction of exporting tariffs. These actions indicated the new government was rejecting the public-sector interventionism that hurt exports and reduced foreign-exchange earnings. Even more important than this vote of confidence was the ability of the new government to reach agreement on defaulted foreign debt the prior administration had refused to pay and had locked the country out of the international debt markets.
In March 2016, Macri was able to obtain approval from Argentina’s Congress to reach an agreement settling a 15-year dispute with “holdout” hedge funds that owned substantial amounts of the debt. The Argentinian government issued US$16.5 billion in debt, with US$9.3 billion allocated to settle with holdouts, US$2.5 billion to pay blocked restructured debt which was performing until 2014, and the remainder to be used to finance part of the fiscal imbalance during the 2016 fiscal year. Argentina’s return to the international capital markets should be considered a major triumph and was extremely well received by investors; its bonds were oversubscribed.
It was remarkable that congressional approval was obtained, since Macri had won the presidential election by a margin of less than 3% nationally. Thankfully, Macri moved fast and immediately lifted capital controls, raised interest rates, liberalized the foreign-exchange market and cut export taxes. He still faced the problems of small and falling international foreign reserves, a bloated public sector, a fiscal deficit of 7% of gross domestic product (GDP) and a wage price spiral, but the global community has by and large welcomed Macri’s policies. The Chinese had previously engaged in a currency-swap deal with the cash-strapped Argentinian government, giving them renminbi in exchange for Argentine pesos so the country would have Chinese currency to pay for Chinese imports, while the Chinese could use pesos to import the raw materials that Argentina produces. Under the new administration, the People’s Bank of China stated that the swap could be converted into US dollars, which would add US$11 billion to Argentina’s central bank assets.
Signaling another boost of confidence in Argentina, US President Barack Obama made an official visit to the country in March after Macri took office. Obama praised the speed at which reforms were being made and signed a trade and investment framework agreement to cooperate in a number of areas, with the hope that US companies would add billions in investment dollars to Argentina’s economy.
Short-Term Pain for Longer-Term Gain
When a populist, high-spending government leaves office, the need for reform results in short-term pain, since the debts generated by the previous government have to be paid. It’s like a hangover after a big party. So it was no surprise to me that when we arrived in Argentina this spring that the English-language Buenos Aires Herald newspaper had the headline: “Electricity rates may jump by 300%.” The article said that President Macri’s administration had paved the way for increases in the wholesale prices of power nationwide that would mean a cut in subsidies for users, particularly in the Buenos Aires area, who had enjoyed the lowest electricity rates in the country. This would be positive for the government’s budget, which has been drained by those subsidies, but also for electric power companies that had to share in the pain. This reform should enable power companies to increase capital spending and enable a reduction or even elimination of blackouts and brownouts, which have been experienced in recent years. We witnessed one case of a brownout when we traveled to the outskirts of Buenos Aires to visit one of the new shopping malls. On the way there, one whole section of the city was dark because of a cut in power for that area.
When I first visited Buenos Aires in the 1990s, the Puerto Madero area was a rundown collection of derelict warehouses along the canal connected to the Rio de la Plata (Silver River). In 1989, city and federal governments formed a joint stock company to urbanize the area, which led to a major restoration and conversion program, which included transforming the old warehouses into trendy restaurants, offices and apartments. The place blossomed, further resulting in entirely new developments of high-rise apartments and office buildings along the river canal. With good city planning, a network of wide roads and picturesque riverside walkways was developed. A number of architects were involved in creating beautiful structures, including my favorite architect, Santiago Calatrava, who designed an ultramodern pedestrian bridge, the Puente de la Mujer (Women’s Bridge), which swings to the side allowing ships to pass. In 2008, the heir to a cement fortune and reputedly Argentina’s richest women, Amalia Lacroze de Fortabat, financed the construction along the canal of a beautiful museum housing her extensive art collection. When I visited, I found it to be quite an impressive collection, particularly of Latin American art. More international hotels are currently planned for the area.
On my most recent trip, the first thing I noticed when driving from the Buenos Aires airport to the Puerto Madero area was a tall, modern skyscraper at the end of the port channel with large logo initials of a Chinese bank at the top. The influence of China has been growing in Latin America and globally. Argentina has imported substantial amounts of telecommunications equipment from the likes of Huawei, China’s electronics equipment giant. Discussing this with the Argentinian telecom companies during our recent visit, we heard that the Chinese payment terms and conditions were very generous and that large teams of Chinese technicians were brought in to do the maintenance, which was deemed as superb.
A Legacy of Mismanagement
In our view, one of the key reforms going forward for Argentina will need to come from the country’s statistical agency. The Kirchner government had fired the head of the agency when she issued (accurate) inflation numbers of over 20% and installed a new agency head to issue false inflation numbers and other inaccurate information. The Kirchnerist policy mismanagement also banned the export of meat in an attempt to protect domestic consumers and keep prices down, but this policy forced many companies that had lost overseas profits to close. At the same time, since it was not profitable to invest in new cattle, the stock of cattlehead declined from 60 million heads in 2006 to 52 million by 2012. This Kirchnerist policy actually created the opposite effect that it originally intended, and