Argentina's Comeback Will Be Oversold

Marketing demands require that banks make new products out of emerging markets.

The newest flavor of the month.

Photographer: Mario Tama/Getty Images

Argentina’s voters have chosen Mauricio Macri, the outgoing mayor of Buenos Aires and a former businessman, as their new president. After 12 years of mercurial interventionism under first Nestor Kirchner and then his wife Cristina Fernandez, Macri’s market-minded pragmatism suggests a dramatic shift. In fact, judging by the markets’ bullish reaction, Argentina may be on its way to becoming the next fashionable Latin American nation.

With the Latin American economy as a whole shrinking for the first time since 2009, the continent could use some economic good news. Yet the fate of past market darlings should give pause to their would-be champions. Recently, for instance, Goldman Sachs closed its BRIC fund -- an investment vehicle that it created after coining the acronym in 2001 to sell stocks and bonds from the booming economies of Brazil, Russia, India and China. After years of mounting losses, Goldman told the Securities and Exchange Commission that it did not see “significant asset growth in the foreseeable future.” The fate of BRIC poster-child Brazil is particularly instructive: It earned a cover on the Economist for stellar growth during the worldwide crisis of 2009; four years later, with the economy stagnating, the Economist recanted. Next year, Brazil’s economy is expected to shrink by as much as 2 percent.

Why do Latin American market darlings emerge and then stagnate or collapse? To answer that question, you must return to 1989, when the International Monetary Fund, the World Bank and the U.S. Treasury Department adopted the Washington Consensus as a strategy for developing nations and the Brady Plan was launched, leading Latin America to seek a solution to its debt crisis by swapping bank loans for bonds saleable to clients. JPMorgan then created the Emerging Markets Bond Index (EMBI) funds with the stocks and bonds of those countries, sales force management systems to place them with clients, and groups of economists who would tout the potential of economic reforms and the bright future such investments were likely to have. It worked: Everyone from high-powered funds to Italian retirees snapped up debt from countries such as Argentina.

The countries and multilateral organizations backing the Washington Consensus pointedly praised those places whose reforms were going well, even if that progress only lasted a few years. Thus, in the 1990s, Mexico and Argentina became fashionable, though the former suffered its so-called Tequila Effect in 1994, and the latter entered into a recession in 1998 and crashed three years later. Even though Chile’s smaller economy slowed its formerly intense rhythm of growth during the 1990s, it earned praise as the only country that saves during boom times in order to face the collapses afflicting economies that are as cyclical as the prices of commodities and interest rates. As the Chilean economist Jose Gabriel Palma has noted, certain countries were also glorified for the sake of demonizing other countries or because their “internal political groups want something less abusive and inefficient. And since there is no country in the region that has grown in a sustained way, it is necessary to regularly change the country that is idealized.”

As the Argentine economy plunged after its 2001 default, the myth of Brazil took hold. In 2003, leftist trade unionist Luiz Inacio Lula Da Silva took office with a combination of orthodox macroeconomics and increases in the minimum wage and social spending that lifted 40 million of his compatriots from poverty. Jose Antonio Ocampo, a professor of economics at Columbia University, suggests this was the first time a Latin American nation that was not altogether faithful to the Washington Consensus had captured market affections. A decade later, accompanied by its own Economist cover, came the inevitable downfall. “Appearing on the cover of The Economist is the beginning of the end, because that’s the spot for countries who have been doing well up until now -- who are at a high point in their cycles -- but then they collapse,” says Eduardo Levy Yeyati, visiting professor at Harvard Business School who previously worked at Barclays creating acronyms for fashionable countries.

Marketing demands require that banks make new products out of emerging markets. They find those that are growing the most and that follow the norms of a relatively standard economy. Thus, as Brazil began to show signs of fatigue, the banks created in 2011 CIVETS, including Colombia, and the MAVINS and the EAGLES, which both included Mexico. When a country falls out of fashion, the markets must elevate and sell another in its place. These emerging market funds feed back into the liquidity so characteristic of today’s world, even though it is the early investors who reap the rewards and the later investors who suffer the consequences when the bubbles burst.

The fall of oil prices will mean that Colombia grows this year at a rate of 2.7 percent and Mexico at 2.3 percent. In recent years, the Colombian economy had been growing by more than 4 percent. But the Mexican economy has been bumping along at this low rate since 2012. Although banks and the media have promoted the Mexico of Enrique Pena Nieto as the successor to Lula’s Brazil on the catwalk, economic imbalances, rising poverty and horrific violence have drowned out that fanfare. Colombia, in turn, never became fashionable perhaps because it lacks a large market of stocks and bonds; its peace talks to finally put an end to Latin America’s longest insurgency, however, have also put a gleam in the eye of some economists.

“What do initials have to do with reality?” asks Levy Yeyati, immediately answering his own question: “Nothing.” Things aren’t going particularly well for the investors’ alphabet soup of countries outside Latin America, including Russia, Egypt, Turkey, South Africa and Nigeria. “Countries lose that sheen because they should never have had it,” continues Levy Yeyati. “Nobody thinks of the United States as being in fashion.” Ocampo agrees: “The problem is not when countries lose that sheen but when they get it. There is an overestimation that creates a speculative agenda that then shrivels with negative news.” Ocampo, who is also a former Colombian minister of finance, points out that his country is talked about more and more, but he warns that, as with all the countries in the region, its growth will depend on developing an export base that does not rely so much on raw materials. He also breaks with the markets and notes that countries governed by the left such as Bolivia and Uruguay are doing well.

Levy Yeyati likes Peru and has high hopes for Argentina. Peru was classified in 2013 by the IMF as the “economic star of Latin America,” but the cheapening of its minerals will result in a growth rate of 2.4 percent this year, and Peruvian President Ollanta Humala continues (like his predecessors) to be one of the region’s least popular heads of state. But Levy Yeyati appreciates Humala’s attempt to develop an economy that will grow at a reasonable rate of 3 to 4 percent without relying on minerals. Argentina, dependent on soy, “may become the country in fashion in two years if the next president gradually makes the changes he will need to make,” says Levy Yeyati.

Macri’s victory may cause Argentina to shine again in the markets, but that may not necessarily bring benefits to Argentines. As Palma observes, “If Macri gains access to financial markets, Argentina may catch a break, but it depends on how he makes the adjustments and if he devalues a lot in one fell swoop, with unpredictable consequences. In an optimistic scenario -- which I do not agree with -- and with the current low price of financial assets, Argentina is ideal for new bubbles in the relatively short term, but in which people will be able to win a lot if they play well.”

It is one thing for a country to earn money for its speculative investors for a season and quite another for it to develop in a sustainable and equitable way. Despite the boost in gross domestic product and reduction in poverty and inequality that Latin America enjoyed in the first decade of this century, such balanced development remains its most demanding challenge, even if it’s less eye-catching for the markets.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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