By Marcos Buscaglia of BofA Merrill Lynch Global Research
In a recent article in Project Syndicate titled Should Venezuela Default?, Ricardo Hausmann of Harvard University argued Venezuela’s government is facing a difficult trade-off between providing basic goods to its people and paying Wall Street. So far, Venezuela has opted for the latter. My BofA Merrill Lynch Global Research colleague Francisco Rodriguez argued in an FT beyondbrics column that this is a false dichotomy, as there is another policy solution to Venezuela’s dilemma: fix relative prices.
We argue that Argentina’s situation is analogous to that of Venezuela’s. Its government has also faced a dilemma, between preserving international reserves to service local law public debt, particularly the Boden 2015, or giving them to importers. Like Venezuela, Argentina has decided in favour of Wall Street thus far, at the expense of its population. This is also a false dilemma, in our view. We believe Argentina needs instead to implement a sustainable macroeconomic adjustment and act to reopen capital markets.
The bust-up between Argentina and its holdout creditors is getting uglier by the day. As the “vulture funds” do their best to prove that there is corruption at the highest levels of government, President Cristina Fernandez responded yesterday by accusing them of engaging in terrorism.
The increasingly dirty fight comes as the holdouts disdainfully reject the possibility that a deal with the private sector might materialise, so rescuing Argentina from its default situation. Aurelius Capital Management said on Wednesday that none of the offers presented by a group of Wall Street banks were even “remotely acceptable.”
Grupo Lala, which controls about half of Mexico’s dairy market, has been running a World Cup promotion to give consumers the chance to win tickets to Brazil. Now, it seems, it could have been eyeing Latin America’s biggest market itself.
According to Bloomberg, Lala is keen to buy BRF’s (Brazil Food) dairy business in Brazil, which the company has reportedly been hawking to potential buyers.
When is bad news in fact good news? Take the case of Argentina, where it is being argued, somewhat counter-intuitively, that the recession looming on the horizon could be the economic cure that the government needs.
Certainly, what has most been bothering the government on the economic front has been the alarming rate of decline of foreign exchange reserves over the past two years. But after a devaluation in January managed to stabilise reserves at around $28bn, they have risen slightly in April.
There is no doubt that emerging market (EM) investors have cheered up considerably of late. Following a torrid January and February, virtually all asset classes in the EM universe appear – on aggregate at least – to be gaining in value.
The bellwether stock index, the MSCI EM index, is up 9.6 per cent from its low on February 5. EM sovereign bonds are yielding an average of 5.51 per cent, down 0.37 per cent since January 1. Local currency bonds are, in many cases, producing stellar returns sharpened by windfall currency gains. Indeed, some EM currencies are among the world’s best performers, with the Indonesian rupiah rising 7.81 per cent, the Brazilian real gaining 7.3 per cent and the Indian rupee climbing 2.8 per cent so far this year.
Buenos Aires: good old days
Argentina used to be known as a land of silver. About 100 years ago, its citizens were richer than the average Western European. The country’s name comes from Argentum (Ag), Latin for silver. How then did it become a relatively poor tinpot regime?
It’s a question that the Economist put on its front cover recently, with an editorial that fingered poor governance as the main cause. However, Alan Taylor, an economic historian of Argentina, suggests some different answers in an NBER paper published this week.
Far be it from Latin countries to indulge in some pre-World Cup schadenfreude. Nonetheless, different emerging markets have clearly been affected very differently by the recent bout of market turbulence. Take those distant neighbours, Colombia and Argentina. Two years ago, finance ministry officials in Bogotá threw a cat among the pigeons when they declared that the Colombian economy was larger than Argentina’s, making it the third biggest in the region (after Brazil and Mexico). Buenos Aires quickly harrumphed back: “Not so!” For one, that might only be the case if you converted Argentine nominal GDP into US dollars using black market (and thus illegal) exchange rates, rather than the “true” official one.
The devaluation is done and the peso has stabilised (for now). But can the government in Buenos Aires prevent another storm from brewing? The signs are not good.
Argentina’s forex reserves are still in freefall. The central bank haemorrhaged roughly 9 per cent of reserves in January to leave it with $28bn, according to Bloomberg. Piling on the pressure, the country’s farmers – even with a weaker peso – refuse to liquidate grain stocks for export. Jorge Capitanich, the cabinet chief who has an eagle eye for “speculative attacks” on the currency, is set to twist their arms later on Monday.
A timely new poll has come our way, commissioned by Graham Fisher & Company for the Emerging Markets Trade Associations, a collection of investors focused on debt. Poliarquía Consultores asked 1,000 Argentinians for their views on the economy, the problems facing the country and president Cristina Fernández de Kirchner.
The three biggest concerns for Argentines are crime, the economy and inflation and voters, the pollsters found, are unhappy with the way the government is tackling them.
What a difference a mountain range makes. To the east of the Andes, Argentina is in the throes of an old fashioned, disorderly devaluation, in which authorities scramble to plug every leaking channel of hard currency flows until at last they are carried off in the flood. To the west, Chile’s authorities are looking on with calm equanimity as their currency gently subsides to its own level.
What is it, other than snow-capped peaks, that unites and separates their two worlds?
When the oppressive heat in Buenos Aires becomes just too much to bear at the height of the austral summer, those who can afford it prefer to jet off to cooler climes to see in the New Year.
But some may have been forced to rethink their holiday plans after the Argentine government moved to stem an alarming decline of foreign currency reserves by bumping up the price at which it sells dollars to Argentines travelling abroad, in what amounts to a stealth devaluation.
It is the end of an era for businesses in Argentina. Might executives even start to miss Guillermo Moreno, the man that everyone loved to hate, in some perverse kind of version of the Stockholm syndrome?
Maybe that’s going too far, but the resignation of Argentina’s trade secretary – who since his rise to power in 2005 became so much more than just a trade secretary – leaves a gaping hole in the implementation of economic policy.
This vacuum of power will be filled by Axel Kicillof, a Marxist economics professor who sports Elvis sideburns, as the new economy minister.
"I'm outta here!"
Guillermo Moreno (pictured), Argentina’s combative internal trade secretary, has resigned, the government said late on Tuesday.
A controversial figure, Moreno has been instrumental in keeping the lid on Argentina’s runaway inflation by strong-arming companies into freezing prices and restricting imports.
As President Cristina Fernández’s rule appears to be coming to an end, investors are hopeful this will spur economic reform. FT comment editor Fred Studemann asks the LSE’s Alejandra Irigoín and FT deputy emerging markets editor Jonathan Wheatley if change is really afoot
Who in their right mind would want to invest in Argentina? Surely its capricious government that delights in changing the rules of the game (or just stopping the game altogether), and its troubled economy warped by price and exchange controls make it a potential disaster zone for investors – right?
Wrong. Investors have been piling into Argentine stocks all year long, with its Merval equity index very nearly doubling this year. Some stocks have quadrupled in value in 2013.