markets

Argentina Goes From Market Darling to Dud

Updated on
  • Inflation jitters mount as central bank takes dovish stance
  • Currency is the worst performer in emerging markets this year

Mauricio Macri’s honeymoon is over, at least in the foreign-exchange market.

The peso is sinking to new record lows against the dollar on an almost daily basis, a slump made all the more unusual as currencies across emerging markets -- and the developed world -- are soaring against the greenback. It’s being done in by growing concern that the central bank is under pressure from Macri’s administration to pull back on its fight against inflation in order to give an extra jolt to the economy. Down 4.9 percent against the dollar, the peso is only outperforming one currency in the world: the Angolan kwanza.

It’s ironic that suspected government interference is at the heart of the peso selloff, two years after Macri took office promising to end the kind of economic distortions overseen by his predecessor, Cristina Fernandez de Kirchner. And while there’s no doubt that Argentina’s economy and finances are in much better shape under the former Buenos Aires mayor -- with access to global capital markets, soaring stock values and an accommodating business environment -- the market-friendly Argentina that investors were promised hasn’t entirely materialized.

“It was all love and kisses when he came into office,” said Ray Zucaro, the chief investment officer at RVX Asset Management in Aventura, Florida, who’s underweight Argentine local debt and overweight the nation’s dollar bonds. “Now is the work section of the marriage, and Macri has to repair many years of bad economic policy decisions.”

Concern about the central bank’s independence rose to the fore last week when policy makers unexpectedly moved to cut interest rates at a second consecutive meeting, leaving analysts puzzling over a disparity between its dovish actions and more conservative language.

That came after Argentina increased its official inflation target to 15 percent in 2018, up from 10 percent, fueling speculation that central bank President Federico Sturzenegger may be under government pressure to cut rates. Higher borrowing costs could imperil an incipient economic recovery that critics have said was slow to come after Macri took office.

Macri said Thursday that the central bank has “absolute independence.” And while the central bank didn’t immediately respond to a request for comment, Sturzenegger said in an interview with Perfil on Sunday that he supports a free, floating exchange rate. Inflation ended 2017 at about 25 percent, missing the government’s target of 12 percent to 17 percent.

Investor jitters are also hitting the debt market. Argentina’s bonds are the worst performing overseas emerging-market bonds, according to data compiled by JPMorgan Chase & Co. Its dollar-denominated debt has slumped 3.1 percent after $38 billion in sales over the past two years created something of a glut. In a sign of just how on edge investors now are, bonds from Chubut province took a nosedive last week after its governor accidentally said he intended to restructure -- instead of refinance -- the debt.

It wasn’t supposed to be this way almost two years after Argentina cut a deal with billionaire Paul Singer and other creditors to put an end the world’s largest-ever sovereign default and the 15-year standoff that followed. When Macri took office in December 2015, he was hailed as a business-friendly reformer who was poised to build Buenos Aires into a bastion of unfettered capitalism and explosive growth. He loaded his economic team with Wall Street veterans, some of whom have argued publicly and privately that a weaker peso would help fuel demand for exports and jumpstart the economy.

But things haven’t gone entirely smoothly for the Macri administration. The president’s successful push to pass a pension bill that would narrow Argentina’s budget deficit sparked a riot outside Congress last month. The inflation rate isn’t falling as quickly as expected and the government’s efforts to plug a stubbornly high budget deficit by issuing dollar-denominated debt is a potentially “toxic combination,” according to Capital Economics.

“Argentina is a show-me story,” said Josephine Shea, who manages the Emerging Market Debt Opportunistic Fund for BNY Mellon Corp., which has topped 93 percent of peers over the past year. “The question is, will the government be able to push through the structural reforms quickly enough for international capital markets before they lose faith?”

That isn’t to say that observers are entirely displeased. Companies from Volkswagen AG to Siemens AG have announced investments in the country, and traders have for the most part eagerly lapped up sovereign bond sales. Investors including AllianceBernstein LP and Landesbank Berlin Investment GmbH have said the country’s high interest rates -- among the world’s steepest -- make its local notes appealing.

But the peso still looks overvalued to many. Analysts surveyed by Bloomberg predict a 2.6 percent drop to 20.1 per dollar by the end of 2018. The government has few policy options as it faces a deficit fueled by subsidies and pensions, according to Greg Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors. And sticky inflation expectations are unlikely to disappear anytime soon.

“Argentina had to quick-start growth through a massive financing program and to also attract inward investment,” Saichin said from London. “This is a slow burning process.”

— With assistance by Carolina Millan, and Andres R Martinez

(Updates bond returns in eighth paragraph.)
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