BlackRock Warns Argentina's Macri in Catch-22 Ahead of 2019 Vote
It’s the Argentine paradox. The more President Mauricio Macri does to reassure investors, the less likely he is to retain power and the more nervous investors become about the long-term outlook.
After negotiating the largest-ever loan from the International Monetary Fund, his administration has pledged to slash spending and raise taxes, while the central bank has pushed interest rates to the highest in the world. Yet money managers from AllianceBernstein LP to BlackRock Inc. aren’t convinced he’ll be able to stay in office long enough to save the economy.
"The determination of the Argentine government to do the right thing is not in doubt, but its ability to do it for long enough is," said Isabelle Mateos y Lago, the chief multi-asset strategist at BlackRock Investment Institute, the asset manager’s think tank in New York. "That has prevented markets from rallying more convincingly so far."
Facing an election in one year’s time, support for Macri fell to 31 percent in early September as the nation slid into its second recession in three years and its currency leads global losses for 2018. But every orthodox step he takes to shore up the economy and halt the rout in the peso risks causing pain that his political opponents will use against him in next year’s election.
Even turning to the IMF is unpopular with Argentines who blame the bilateral lender for the economic debacle of 2001, said Priscila Robledo, an economist at Continuum Economics in New York, who expects Argentine assets to selloff further in the second half of 2019 on a Macri defeat.
A gauge of confidence in the government has dropped to the lowest since Macri took office in December 2015.
Investors fear that while Argentina’s opposition, notably former President Cristina Fernandez de Kirchner, has been bludgeoned by bribery allegations, Macri’s failure to deliver economic growth could anger voters even more.
Economy vs Corruption
"People will always vote with their wallets," said James Gulbrandsen, a Rio de Janeiro-based money manager who helps oversee $3.5 billion at NCH Capital, which reduced its Argentina exposure to zero earlier in the year. "The economy typically trumps outrage over corruption."
The cast of potential challengers Macri will face include Juan Manuel Urtubey, the centrist governor of Salta who’s affiliated with the opposition Peronists, Sergio Massa, ex-chief of staff to Fernandez, and perhaps most disturbing to investors: Fernandez herself.
The former president, who has denied wrongdoing, was indicted last month on corruption charges in a sprawling graft probe ignited by a chauffeur for a government official who documented years of bribery in a notebook. Fernandez is accused of "illicit association" and of having received bribes from public works contractors during her tenure in the presidency between 2007 and 2015, according to court documents. Fund managers also blame her for years of currency controls that deterred foreign investors, a decade-long dispute with creditors and a system of subsidies that fueled the budget deficit.
"Foreign investors will probably throw in the towel and give up on the country if it returns to Peronism," Gulbrandsen said.
Still, Urtubey would be more acceptable than other Peronists to investors. He was at the press conference when Economy Minister Nicolas Dujovne announced spending cuts and promised to reduce expenditure in his own province, providing implicit support.
As the economy contracts though, Macri may do well to even reach the election. Apart from the dictatorship era, no non-Peronist has ever finished their elected term in the past seven decades.
“It is the most important risk factor in Argentina right now," said Shamaila Khan, the director of emerging-market debt at AllianceBernstein in New York. "If Macri does not win and his party loses there would be a very negative impact on Argentinian assets."
Ben Bartenstein & Patrick Gillespie