A Weak President Macri Has Investors Dumping Argentina
Mauricio Macri is in the biggest crisis of his tenure. The market has spoken, and they do not like what they are seeing. Macri is close to becoming a zombie president unless inflation—now over 51% on a rolling 12-month basis—drops dramatically. A decline of 10 basis points won’t cut it.
A recent poll by Synopsis in Buenos Aires showed respondents listing inflation as the biggest problem facing the economy. Some 44.6% said inflation was their biggest economic concern, followed by 19.2% who said unemployment.
Some investors have called it Argentina’s “Macrisis.” On Thursday, it looked like that crisis has spurred a panic attack, with investors fearing defaults and selling out of Argentinian debt.
It is now not that far off from levels reached in the run‑up to Cristina’s 2014 default.
Argentina’s peso fell 2.3% and is now at 44.95 to the dollar today. If this keeps up, it’s going to 50 by August.
The Global X Argentina (ARGT) exchange-traded fund was down 2.25%, starting to chip away at the fund’s gains on the year. Over the last four weeks, since some polls have shown Macri losing to Cristina Kirchner, the fund is down 8.98%. The peso shed another 6.55% over the same period.
Kirchner is largely considered the one who got Argentina into this mess. Macri inherited a quasi-communist economy, held up by sticks and duct tape funded by government subsidies, price controls and other social programs. Her economy survived on a black market currency rate that differed from the central bank rate, and dollar-based businesses like tourism, export commodities and real estate.
With his election outlook deteriorating by the minute, Macri announced Peronist-style price controls on some 60 items last week.
One week later, after digesting what’s been happening in Buenos Aires, investors decided to take some money off the table in hopes that Macri and his economic team can get their act together. If they do, speculators who are buying on the declines will be greatly rewarded.
Odds are not in their favor at this point.
“Looked at from the top down, Argentina looks scary,” says Sara Moreno, managing director and co-fund-manager at Jennison Associates in Boston. “It’s unfortunate. There is a lot of potential in Argentina, and the consumer class is so big. They should be in a much better place,” she says, mimicking what nearly every Argentine has said since the turn of the century, when Nestor Kirchner, Cristina's husband, took over and defaulted on around $82 billion.
Argentina owes the IMF $56 billion. It is the Fund’s biggest-ever aid package.
“It’s hard to know if Cristina wins if she would pay that debt or not,” says Roberto Simon, senior director for policy at AS/COA in New York.
The market reaction today may be overdone, but if Cristina maintains her lead come August-September markets will look worse than they do today. Elections are in October.
Other opinion polls, like the well‑respected pollster Elypsis, still show Macri neck-and-neck with Cristina. But like inflation falling just 10 basis points not being enough to turn things around for him, neither are 50-50 odds. That’s a nail-biter, with the lead top contender having defaulted just four and a half years ago.
“I think they will default again,” says Luis Maizel, senior managing director of LM Capital Group, a $4.5 billion wealth management firm in San Diego.
There is a real and growing risk that the president proves unable to break the ongoing vicious cycle of currency depreciation, high inflation and increased political risk. His package of emergency anti-inflation measures announced last week might help temporarily, but producers of those items will hold back production if they know they are not getting paid as much as they were just a few weeks ago.
Macri needs better-than-good economic data. He needs stellar economic data. The only way he gets it is from the agribusiness sector. That could help him in the best-case scenario that he is in a tie with Cristina later in the campaign cycle. Consumer sentiment in the farm belt states, which sell goods in dollars, might be in good enough shape to squeak out a win for Macri.
“If he cannot rein in inflation, Macri's reelection bid is at risk,” says Fiona Mackie, Latin America regional director for The Economist Intelligence Unit.
Moreover, there is a chance that U.S. financial support and the imminent inflow of dollars from this year’s bumper harvest will keep the peso from tanking. People have been saying this since January, however, and the peso has only gotten weaker.
Much like Macri’s presidency.
Nieves Zuberbuhler, a freelance journalist who has done work for 60 Minutes in Argentina, left the country this year. She considers herself one of the lucky ones. Her sense of frustration and disappointment in Argentina is obvious.
“I was super hopeful after Cristina Kirchner left. But it was a very tough year to live there. It’s a country where nothing works,” she says. “I love my country, and it makes me sad that so many people there feel helpless. Governments keep promising that things will get better, but in the meantime, the people suffer a lot.”
If moderate Peronists can rally around former economy minister, Roberto Lavagna—whom markets view favorably enough—instead of Cristina, then there is a chance that the bloodletting in Argentine assets will stop.