Argentina Needs The Best IMF Deal Ever, Or It's Curtains For Macri In 2019
The IMF is on standby to bail out Argentina yet again. If history is any guide, the government that opens the door to the IMF, even for a peak inside to look at the kitchen countertops, is usually kicked out the door with the IMF, never to be seen again.
It happened in Argentina before, ushering in years of socialist economic policies run by the Kirchner team, Nestor and later his wife Cristina Fernandez. And it happened in Brazil, ushering in over 13 years of the Workers' Party, whose president—Luiz Inacio Lula da Silva—is now in jail.
In short, if this $26 billion standby arrangement with the IMF does not go swimmingly well, it is curtains for Mauricio Macri in 2019. Everybody knows this.
Wall Street is rooting heavily for this guy.
It seems like Argentina investors are split between the notion that the economy will have to dollarize, sending the peso to new and depressing lows against the dollar. Or will come out of this better than before, a patient cured of their ills. It is a worst-case/best-case scenario tug of war down there. There is no middle path. There is no nuetral call. Either you’re sticking with Argentina, or you’re bailing on her.
The Macri Administration has been forced to make painful economic adjustments over the years. The previous two governments ran Argentina as if it was the Sweden of the South—heavily subsidized and quasi-socialist. Two economies existed: one priced in dollars and one priced in pesos, which had two values. There was the official value and then there was the mercado azul value, which was at least 25% different than the central bank rate and sold illicitly. Macri has spent his last three years in office trying to remove distorting subsidies and fix this two-level currency system. It's led to this.
The latest cabinet reshuffle upgraded the status of Economy Minister Nicolas Dujovne to a “Super Minister” position. This should resolve the criticism about failed communication among the economic team as decisions are now to be centralized around him and de-emphasizing the central bank.
The central bank raised interest rates three times in a four-week period, with two of them occurring in a roughly three-day period of full-on panic mode. Government officials spent hours on news sets trying to explain what was going on.
Overnight lending rates there are now a growth-hindering 40%. Rolling 12-month inflation is around 25%, meaning real lending rates are still quite high.
Siobhan Morden, head of Latin America fixed income for Nomura Securities, said in a note to clients on Wednesday that she was “confident about the economic team and its ability to deliver effective management.”
The IMF is now back to being one of the biggest stories in Latin America, thanks to Macri and his economic team.
Bondholders want to believe this time will be different. They have been betting for at least two years now that Argentina will recover its benchmark weighting in emerging-market bond indexes, pushing up the value of the Argentina bonds they hold as more investors are mandated to own them if they track that particular benchmark. They hope Macri can deliver the best IMF package in South American history and that by late 2019 the economy will be stronger as a result of it all. Argentina will be a healthier economy, and Macri, or someone of like mind, is elected to work at the Casa Rosada for the next four years, instead of the Peronistas. After all, to investors, it was the Peronistas that caused all these problems. Macri is Mr. Fixit.
“The investment case for Argentina sovereign debt still stands ,” say Gorky Urquieta and Rob Drijkoningen, both emerging-market bond fund managers for Neuberger Berman. “The Macri administration can achieve reform progress,” they wrote this week in a public report titled Don't Cry for Argentina.
For Neuberger Berman, it’s not curtains for Macri just yet. This seems to be the consensus view on Argentina within the big emerging market bond players.
“The fact that the next election is not due until late 2019 should help buy time for markets to adjust and allow some benefits to show through,” the Neuberger Berman fund managers believe.
It has been a wild two months. The central bank’s reputation has suffered, and concerns have been raised about its independence. The peso’s moves against the dollar have steadied. How long that lasts depends on Super Minister Dujovne, the IMF and a cooperative global backdrop. One wrong move and it is definitely curtains for Macri in 2019.