With a presidential election less than six months away, Euromoney Country Risk asks three analysts whether, almost 10 years after default, the markets are overpricing Argentine political risk.
The Argentine government’s decision to restructure its debt almost a decade ago has still not been forgiven by the markets. At over 600bps, credit default swaps on Argentine five-year government debt trade far outside most Latin American sovereigns and only 100 bps inside Ireland. Despite GDP growth of 9% in 2010, and favourable debt metrics, sovereign and corporate credits are trading at attractive yields compared with regional favourites Chile and Colombia.
With a presidential election less than six months away, Euromoney Country Risk asks three analysts whether, almost 10 years later, the markets are overpricing Argentine political risk.
Bret Rosen, sovereign debt strategist, Standard Chartered
“We believe that substantial political risk exists in Argentina, given the proximity of the upcoming presidential elections in October. First, uncertainty surrounds whether current president Cristina Fernandez de Kirchner will be a candidate. Our base case has been that she will run for re-election and that she will be re-elected. Indeed, recent polling shows her popularity running in the mid-50s. She has benefited from an economy growing at a rapid rate, a consumption boom and sympathy in the wake of the death of her husband Nestor Kirchner last year. However, she has given mixed signs of her intentions in recent weeks, and we await her decision in the next couple of weeks.
“Additionally, the opposition candidates are just now becoming defined but there are still doubts about the formation of alliances among various parties.
“Regardless of who the next president of Argentina is, that individual will confront a litany of problems, namely inflation, which is running at around 2% per month, deterioration of fiscal and trade balances, an exchange rate that may have to depreciate, feisty unions, an unwieldy Congress, and of course the overhang of the unresolved debt with the Paris Club and private creditors. To conclude, we doubt that any of the major candidates will be able to rapidly implement market friendly economic policies in Argentina.”
“The financial markets are still overly concerned with political risk in Argentina, in our view. That being said, the possibility of Cristina Fernandez de Kirchner gaining re-election in this October’s presidential vote is being viewed with less chagrin than one might have imagined even a few months ago. Anxieties may appear as the formal campaign begins and the opposition solidifies behind a common candidate. This would raise the risk of economic policies becoming even more populist, in other words, expansionary. In the meantime, investors are balancing perceptions that fiscal and monetary policy are being run with one eye on the election, with the eyes of investors themselves on the commodity price screens, and grain prices remain elevated, if below record highs.
“Nevertheless, a few disconcerting items continue to lurk in the background. For example, the Fernandez administration invited the IMF to Buenos Aires in a high-profile manner to provide advice on statistical methodology, and primarily the inflation index. The IMF completed its work and produced a report for the authorities. In addition, the once near-certain Paris Club agreement remains elusive.”
“The Argentine government has aimed to maximise current economic growth, regardless of the economic or political cycles. As a result, the market is pricing that the use of expansionary fiscal and monetary policies will persist after the October election. Moreover, this perception is taking for granted further use of heterodox policies to ameliorate the effects of mounting macroeconomic imbalances.
“Rather than pursuing traditional economic policy, the government is relying increasingly on direct intervention in the economy as distortions build up. This is fuelling capital flight and portfolio dollarization in the run-up to the election. Fiscal spending is growing rapidly, monetary aggregates are expanding at a fast pace, real interest rates remain in deep negative territory and the peso is appreciating steadily in real terms. The cocktail of high inflation, soaring fiscal and monetary impulse and a rapidly narrowing current account surplus puts increasing pressure on a tightly managed foreign exchange rate.”
|A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.|