Sun | Sep 24, 2017

Walter Molano | Argentina: No time to waste

Published:Friday | September 23, 2016 | 9:00 AM
In this September 13, 2016 photo, business executives are reflected in the windows of the Kirchner Cultural Center terrace during the Argentina Business and Investment Forum in Buenos Aires. Over 1,500 foreign and local business leaders participated in the three-day forum organised by the government to attract investment to the country's frail economy. (AP Photo/Natacha Pisarenko)

Time is a commodity which Argentina sorely lacks. The new economic team did not dawdle when they took over. They settled with the holdouts in record time, leaving scores of investors and bankers with a wide set of Cheshire cat grins.

They devalued the currency, leaving the holders of ROFEX contracts with a tidy windfall. They hiked interest rates, making the Argentine peso such an attractive carry trade that even Brazilian investors decided to pile in. Lastly, they pushed up utility rates several hundred per cent in one fell sweep, sending the shares and bond prices of the utility companies into the stratosphere.

There is little wonder that Wall Street has fallen in love with Argentina. Of the US$60 billion in new bonds that have been placed in Latin America this year, half have been from Argentina. Even the Province of Tierra del Fuego, the deep outpost next to Antarctica, accessed the market. No one is to say that the measures were not needed, but the rewards have been very concentrated in a handful of sectors.

At the same time, the costs have been placed squarely on the Argentine population. Inflation soared after the devaluation and the increase in utility rates. An estimated 1.5 million Argentines were pushed into poverty since the start of the year. The government said nothing to justify its actions or deliver a message that would soften the blow.

Economy Minister Alfonso Prat-Gay, an arrogant white-shoe banker with an Ivy League degree, believes strongly in Adam Smith's invisible hand of the market. His rhetoric is music to the ears of the devotees of Ayn Rand, but they mean nothing to the rank and file who are bearing the brunt of the adjustment.

In the long run, the economy minister may be right. As long as the government creates the macroeconomic environment needed to attract foreign investment, the market will decide how to take advantage of the nation's natural endowments.

Yet, unless the government can communicate its vision and provide a beacon of hope to the society, the population will rebel - and the investment will never materialise.

Unfortunately, cracks are starting to appear on the Macri facade. The president's popularity is dropping, and protests are on the rise.

Discontent of the masses

More than 200,000 Argentines took to the streets a few weeks ago, railing against the current economic environment. Some of the militancy was instigated by the Kirchner-led opposition, but most of it was genuine.

The Kirchner movement remains highly discredited due to the deluge of evidence that has emerged since they left office detailing the blatant corruption that took place. On top of that, some former officials have called for political violence against the administration. There have already been scores of bomb threats against the presidential palace and residence.

President Macri's motorcade was pelted with rocks at a political rally in Mar del Plata. Furthermore, Hebe de Bonafini, one of the leading figures against the military dictatorship of the 1970s and also at the centre of some of the worst corruption allegations, flagrantly defied an indictment to appear before the judiciary - in the process fuelling the sense of lawlessness.

The Macri administration takes comfort in knowing that the opposition is not a credible threat, but this is not enough to cover up their blunders. The population is demanding results from those they elected to office.

The midterm elections are only a year away, and at the current pace, Macri's PRO movement will be trounced.

As we said so many times since he took office, the government needs a plan. While there has been a deluge of portfolio investment, the foreign direct investment has failed to materialise.

Portfolio investors can always liquidate their positions at the drop of a hat, but the foreign direct investor is in it for the long haul. Once the commitment is made, it is for years. Therefore, there is little surprise that the foreign direct investor is staying on the sidelines.

Argentina's political horizon is all but certain. The president's popularity is falling. The PRO will probably be routed in the midterm elections. The level of political violence is on the rise. A militant opposition is unchecked and becoming more brazen by the day.

Many policy decisions are being done unilaterally and without public consultation, only to be reversed by the courts. These are then being reversed again by the higher courts. There are energy shortages, and the private sector is being singled out by the administration. Another large devaluation may be on the way, and the unions are contemplating a general strike.

Therefore, you can't blame the foreign direct investor for staying away.

Prat-Gay may have created a generous payday for his pals on Wall Street, but he did nothing to make Argentina a more sustainable country. The sad thing is that time is running out.

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

wmolano@bcpsecurities.com