Fri | Oct 19, 2018

Walter Molano | Argentina off to a rough start

Published:Friday | January 29, 2016 | 12:00 AM
New president of Argentina, Mauricio Macri.

Argentine assets are priced for perfection, but the administration of President Mauricio Macri has had a rough start.

To be fair, the outgoing Kirchner administration left major obstacles that only hampered the way. Several of these impediments were well known, such as the currency controls, the grossly overvalued exchange rate, the ROFEX liabilities and the huge fiscal deficit.

However, others were not as well-publicised, such as the immense arrears. For example, the Argentine government owed the governments of Bolivia and Paraguay for several years of gas and electricity purchases.

The Argentine scientific base in Antarctica was without supplies. Government ministries were full of phantom employees that represented an enormous drag on the fiscal accounts. Argentines call these people 'gnocchis', after the Italian dish that is traditionally served on the 29th of the month - since that was the only time they were ever seen at work.

There were also serious questions about the allegiance of the police and security forces. The issue came to the forefront a few weeks ago, when three men accused of drug trafficking and murder escaped from jail.

The men had fingered AnÌbal Fern·ndez as having a major role in trafficking activities. Fern·ndez held several senior cabinet positions under the Kirchners and had recently run for governor in the Province of Buenos Aires.

There were signs that the fugitives were aided and abetted by the provincial police. In the end, the trio was captured, but only after a massive manhunt that was led by the military. The incident not only highlighted the complications facing the new government, it also showed some of their flaws.

The search for the escapees read like a Hollywood script, with shoot-outs, high-speed car chases and narrow escapes. Doubtlessly, the story will be converted into a movie. Many times, the men slipped through the security net that was being drawn around them, indicating inside assistance. This was particularly the case when they were on the run in the Province of Buenos Aires.

Notoriously corrupt

The provincial police force is notoriously corrupt and most of the top brass was appointed by former Governor Daniel Scioli, a member of the Kirchner camp. The band was finally captured when they moved into the neighbouring province of Santa Fe, which is headed up by a fiercely independent socialist governor.

Nevertheless, there were indications that the Macri administration may have been also held up by the government in Santa Fe. On January 9, the Governor of Buenos Aires, Maria Euegnia Vidal, a close ally of President Macri, announced that the men had been captured. Their truck had overturned on a back road.

The president immediately tweeted to congratulate her, only to have the provincial police from Santa Fe clarify that only one of the fugitives had been captured. Two days later, the remaining men were "apprehended" less than a thousand metres from where the first man was captured. The incident suggested that the provincial police had all three men from the start, but refused to give them up until they extracted some concessions from the government.

The fugitive incident mirrored some of the missteps in the economic arena. The devaluation of the peso was timid, to say the least. Although the exchange rate controls were lifted, there was still a great deal of currency restrictions. As a result, a considerable gap remained between the official and the parallel exchange rates.

Many grain exporters are holding off on selling their harvests in anticipation that the currency could move higher. At the same time, measures to raise electricity rates were delayed.

Lack of experience

The shares of electricity companies, such as Pampa and Edenor, slipped from their highs because of disappointment with the lack of progress in normalising rates. Likewise, the government's attempt to secure an international bridge loan to bolster international reserves was squashed.

All of these realities suggest a certain lack of experience. Even though some of the ministers have extensive operational experience, one thing is running a large city like Buenos Aires and another is running a nation. There will definitely be a learning curve. Unfortunately, this is not priced in.

Last year, when emerging market bond yields were extremely low, Argentina provided interesting returns and opportunities. This is no longer the case. The entire asset class has been hammered by the decline in commodity prices and the hike in Fed funds.

Bargains abound in countries with higher credit ratings, such as Brazil and Russia. Investors have a wide range of options in corporate bonds with viable credit stories. This will surely limit the appetite for Argentine assets.

The country may be priced for perfection, but it has a difficult road to traverse.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.