Argentina: Start the countdown
Hollywood space movies typically depict a small control room, packed with engineers with pocket-protectors, huddled over small computer screens.
In the background, a robotic female voice counts down the seconds prior to lift-off. As the numbers fall into the single digits, the flight director turns to each of his leaders for a final report. One by one, they shout out ‘Go!’
The massive engines are then lit, engulfing the screen with a sea of flames, and the camera pulls away to see the spaceship soaring into an azure sky. Like movie watchers at the local cinema, we are also witnessing a countdown. This time, it’s not a spaceship, but Argentina, and hopefully, in 2019, we should see it soar into the stratosphere.
The Argentine countdown checklist was established by the International Monetary Fund (IMF) less than a year ago when it came to the rescue. It consists of four major milestones.
The first is the reversal of the trade/current account deficit into trade/current account surplus. This item on the checklist was achieved in September, when the country reported its first trade surplus in almost two years. Exports exceeded imports by US$314 million. By November, the monthly surplus had tripled and was approaching US$1 billion. At least from a trade perspective, the situation was a go.
The next item on the checklist was inflation. This one was a bit trickier. Inflation, during the month of September jumped 6.5 per cent, compared to an increase of 3.9 per cent the month before. The number improved slightly, to 5.4 per cent, in October. However, another drop in the currency and very sticky prices resulted in higher consumer prices and an annual devaluation rate that was reaching 50 per cent.
Fortunately, the number came in much better in November, when consumer prices rose only 3.4 per cent. The recession started kicking in and the new economic programme that was agreed to with the IMF started taking effect. The programme was nicknamed the ‘three zeros’ - zero fiscal deficit, zero currency intervention and zero monetary expansion.
With the introduction of the banded-currency system, the only way that the central bank could increase the monetary supply was if the peso hit the lower edge of the band and it was forced to buy dollars. As a result, consumer prices began to stabilise. Economists have established for decades that inflation is purely a monetary phenomenon. Therefore, the inflation milestone will soon be a ‘go!’
The third item on the check-list will be a reduction in interest rates. Fortunately, they have dropped 600 basis points from the previous high, and are poised to go lower as inflation continues to decline.
Last of all, the final item on the checklist will be a return to the capital markets. The end of 2018 was one of the worst months for debt issuance. Nevertheless, half a dozen Argentine firms tapped the international capital markets. The sovereign’s return to the international debt markets will signal that the government is no longer on multilateral life support, and investor confidence has returned. Therefore, it will be the decisive economic condition needed for Argentine asset prices to fly.
Of course, investors remain concerned about the political picture. Most people consider that the hefty multilateral support is contingent on President Macri remaining in office. Both the United States government and the European Union were very put off by the Kirchner administrations, particularly Cristina Fernandez de Kirchner’s flirtations with Iran and Venezuela. Therefore, they mobilised resources to bolster the Macri administration.
As proof of their strong support, most of the assistance programmes expire at the end of President Macri’s first term in office, and they will probably not be renewed if Cristina returns. This is the reason the markets are so concerned about the upcoming presidential elections.
The most recent polls showed President Macri’s political support pulling away from his rival. This was on the back of a very successful G-20 summit in Buenos Aires and the stability of the currency. It is remarkable that his support did so well, in spite of the fact that the economy was transiting its most difficult moments. Fortunately, it should be on track for a solid recovery in the second quarter of this year.
Most signs suggest that employment and industrial activity should be on the mend by April and May. This will be just in time for the presidential campaign to move into high gear. It will also be the last item on the check list, before all of the engines ignite and the country begins to lift off into the stratosphere.
Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.firstname.lastname@example.org