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Argentina seems to be back on track. This country with huge economic potential has suffered for decades under populist regimes. But the wind of change is blowing with a new generation of politicians and their dynamic leader Macri. “We are cautiously optimistic.”
“I still bear the scars of investing in Argentina.” Emerging market bond investor Paul Murray-John was around when Argentina defaulted on USD 82 billion worth of outstanding sovereign debt in 2001. “This taught me an important lesson. When you invest in an emerging country as an outsider you have to always bear in mind that you are an easy target for populist politicians. Why should they pay you rather than their supporters, the poor, pensioners or whoever else they want to encourage to vote for them?”, says the portfolio manager of Robeco Emerging Debt.
Robeco senior portfolio manager for emerging markets, Fabiana Fedeli agrees with her colleague: “Argentina is a country that demonstrates just how important political risk can be for an investor. It has a murky history of terrible political decisions and is a good example of the havoc that socialist-populist and interventionist economic policy can wreak.”
It is astonishing how far Argentina has fallen. In the early twentieth century the economy was flourishing. It was one of the most prosperous countries in the world, with per capita income at 80% of that of the US and almost on a par with Britain. But this is all just a distant memory in today’s Argentina. Years of political populism, military coups, media control, an isolationist approach to trade and a lack of interest in foreign policy have made the country a shadow of its former self. The country’s urbanized and well-educated population has seen its relative wealth decline over decades of political instability and periods of hyperinflation.
And the numbers reflect this. The Argentine economy has seen pretty dismal growth over the last 35 years. While the country's GDP has grown by 1.88% on average, annual per capita GDP has only increased by 0.62%. The relatively low level of the growth itself is less of issue than the fact that since 2003 it has come largely from public spending on social security, for instance, rather than from productivity or the development of competitive industry.
Productivity is poor and Argentina historically lags its Latin American peers in this area. Doing business there is also difficult. In the World Bank’s ‘Ease of doing business’ ranking, Argentina (116) still trails Mexico (47), Peru (54) and Chile (57), but has now overtaken Brazil (123) and is way ahead of Venezuela (187). And it ranks 104 in the World Economic Forum’s Global Competitiveness Index – also way behind Colombia (61), Peru (67), Uruguay (73), Brazil (81) and Ecuador (91).
Argentina demonstrates the importance of political risk for an investor
But there is a wind of change blowing in the second largest and third most populous country in South America. This started with the election of the business and market friendly president Mauricio Macri in 2015. Although they retain a ‘healthy dose of skepticism’, both Murray-John and Fedeli are ‘cautiously optimistic’ and regard Argentina as an interesting long-term investment opportunity for both fixed income and equity investors.
“Do not expect Argentina to be able to extricate itself from populism and recession within a heartbeat, but the building blocks are there”, concludes Fedeli. “Besides the new government that has rekindled hope for Argentina, the country has a rich supply of fertile land for soya, grain and beef and plentiful natural resources in the form of metals and minerals. Its shale oil and gas reserves are the third largest in the world and its long coastline provides access to rich fishing grounds.”
Fedeli recently visited Argentina to talk to government and central bank representatives about the economic, monetary and fiscal reforms and with corporate management about the business climate. “There is a certain level of excitement as there are positive changes. I met a career economist at the central bank. He told me that after years in his job under the Kirchner regime, which massaged economic statistics to hide its mismanagement, he can finally be a real economist and do his work properly. He now gets to work with ‘real’ numbers!”
If you want to find out more on the country’s turbulent political history, the daunting task faced by President Macri, the impact of economic reform on the man in the street and the investment opportunities Fabiana Fedeli and Paul Murray-John see in Argentina:
This is the first article in a series of four where we look at countries that are not yet at the forefront of the emerging universe. Countries with potential – this could be in the form of cheap labor, plentiful raw materials, increasingly stable political systems or an improving macroeconomic backdrop. They still have to develop and mature, but they could become the rising stars of tomorrow.