Argentina Fundamentals Still Deteriorating
By Win Thin
After all the media coverage of Argentina’s move to seize a controlling stake in oil company YPF, there are still some points worth highlighting. This move is simply the latest in a string of market-unfriendly moves by the government. While former President Kirchner was not in power when Argentina defaulted, he was during the 2005 debt restructuring that shoved big haircuts down the throats of investors. His wife and current President Fernandez has taken the ball and run with it, having presided over the seizure of $29 bln in private pension fund assets back in 2008 as well as price caps, regulatory and anti-business measures, and countless others that have stifled the private sector.
Fernandez said that inadequate investment in exploration and production was the rationale behind the decision to seize YPF, but given price caps on energy and other regulatory measures that cut into profits, it’s no surprise that YPF could not or would not commit more resources to its Argentine operations. There are plenty of negative implications for Spanish parent company Repsol, but we do not think there are any implications to the Spanish sovereign outlook as a result of the seizure. Still, the seizure couldn’t have come at a worse time for Rajoy, as he struggles with budgetary issues.
Basically, Fernandez is doubling down on its past policies that have done nothing but push Argentina closer to crisis. Put in the context of Latin America, Argentina is going further down the road traveled to some extent or another by Venezuela, Ecuador, and Bolivia. This group stands in sharp contrast to the orthodox-oriented core of Brazil, Chile, Colombia, Mexico, Peru, and Uruguay.
A look at the fundamentals shows why Fernandez is engaging in such visible theatrics, which also includes recent vitriol regarding the Falkland Islands. Simply put, we think economic stresses are intensifying. How deep the stresses will get is yet to be determined. Economic growth is slowing sharply after years of robust growth driven by high prices of its grain exports. GDP rose 7.3% y/y in Q4 vs. 9.3% y/y in Q3. Monthly data so far are pointing to a further slowdown to around 5.3% y/y in Q1. On the external side, export growth was weakened to around 11% so far in Q1 vs. average of 20% y/y in Q4 and 26% y/y in Q3. The current account surplus has rapidly fallen and moved into deficit in Q3 and Q4. For 2012 as a whole, the gap is expected near -1% of GDP.
Source: Bloomberg
Despite high inflation, the central bank has kept the repo rate at 11.5% since October 2009, when it cut rates 25 bp. Instead, the bank has counted on price controls and other unorthodox measures (including changing the CPI basket) to keep official inflation low. Private sector economists estimate true inflation to be closer to 25% than to the official rate of 9.8% y/y posted in March. Fiscal policy remains too loose after the election, with generous wage agreements adding to upward price pressures.
Source: IMF, BBH
President Fernandez easily won a second four-year term last year with 54% of the vote, with her nearest challenger at 17%. A weak and divided opposition helped Fernandez win, as did the then-booming economy and increased government payouts designed to help offset the negative impact on households of high inflation. Clearly, her second term will be rockier than her first, and that seems to be unfolding now. Fernandez will maintain the unorthodox mix of policies for now, and has shown little willingness to more towards orthodoxy during her first term. What is most troubling to us is that the Argentine populace appears supportive of the move to seize YPF, with a recent poll suggesting that two thirds of the populace supporting the takeover. We suspect that more moves to renationalize companies and industries could be seen ahead in Argentina, since they appear to play well to the domestic audience. Yet we wonder how supportive the voters will remain as the economy worsens further.
High inflation and deteriorating external accounts should maintain downward pressure on the peso in 2012. Recent measures requiring exporters to repatriate earnings and insurance companies to move investments domestically signal concern with capital flight. While authorities will continue to favor peso weakness, those moves suggest they will try to keep pace slow and steady. Argentina can regain competiveness with greater nominal depreciation or lower actual inflation. The former will be much easier to achieve than the latter. Note that the Merval is greatly underperforming in the region, down -8% YTD in USD terms even as most others in Latin America are up double digits YTD.
Source: Bloomberg
About Win Thin
Win Thin is the Head of Emerging Markets Currency Strategy at Brown Brothers Harriman. He has a broad international background with a special interest in developing markets. Win received his Ph.D. in economics from Columbia University in 1995, specializing in international and development Economics. He received an MA from Georgetown University in 1985 and a B.A. from Brandeis University 1983.
