For nearly a decade, Argentina has been isolated from international capital markets after declaring the largest sovereign debt default in history. But now the country is re-emerging.
Next year’s presidential election looms large.
The 2009 mid-term elections were a staggering defeat for the ruling Kirchnerista wing of the Peronist party, which has held power since 2003. Unless current president Cristina Kirchner and her husband, ex-president Nestor Kirchner can pull a rabbit out of a hat, they are on a fast track to political oblivion. But, in the context of Argentine politics, 12 months is an eternity and the Kirchners have shown that they will do everything they can (and some things they can’t) to maintain power.
Traditionally, Argentine politicians try to cling to power through social welfare rhetoric and runaway domestic spending, as well as high (and somewhat counterintuitive) tariffs on the country’s agricultural exports: soybeans, beef, an emerging wine industry. These policies cause substantial fiscal gaps; we then see tactics such as Ms. Kirchner’s 2008 nationalization of the country’s pension fund system.
That move, which she justified as a response to the global economic crisis aimed at protecting investors, was actually a move to gain access to funds that would cover debt payments coming due after the massive restructuring in 2005. While she got away with it legally, she paid a price in the 2009 elections.
|Argentine Stocks in ADR|
|Alto Palermo||APSA||Real Estate||$208M|
|Apco Oil & Gas||APAGF||Energy||$791M|
|BBVA Banco Frances||BFR||Banking||$1.09B|
|Grupo Financiero Galicia||GGAL||Banking||$681M|
|Telefonica de Argentina||TAR||Telecom||$1.81B|
|Transportadora de Gas del Sur||TGS||Energy||$540M|
Desperation tactics Unfazed (or maybe fazed) she responded to the 2009 electoral disaster with a new law that obstructs media access for her critics, but squelching the message is not enough. Argentines have a history of taking protests to the streets, en masse, by banging pots and pans if they must. Seriously, it’s called Cacerolazo --and the last time it happened was, you guessed it, 2001! This year brought another desperation tactic: the seizure of Argentina’s central bank, accomplished through the sacking of an uncooperative president and his replacement by a Kirchner ally. Barring an unforeseen reversal, Mrs. Kirchner is poised to tap in to the bank’s $6.6 billion reserves in the same way she raided the pension funds. The new bank president has been confirmed, so Mrs. Kirchner’s victory appears to be complete.
Debt Swap Less incendiary, but no less important, was the completion of the 2005 restructuring through a new debt swap with the approximately 24% of the country’s bondholders who rejected the 2005 terms. The general terms of the new offer were unveiled in mid-April; Argentina has since received requisite regulatory approvals from the four relevant markets of Italy, Luxembourg, Japan and the United States. Nestor Kirchner was unanimously elected as the first general secretary of the new Union of South American Nations (UNASUR). The organization was created in reaction to the perceived domination of the Organization of American States by U.S. governmental interests and is intended to strengthen cooperation between the 12 member states. This will include areas such as finance and energy, which are likely to have a direct impact on various Argentine ADRs.
The Risks and the Opportunities
What is there to like with regard to investments in Argentina, given the foregoing?
- The inflammatory tactics of a [likely] lame duck administration cannot change the fact that Argentina possesses a huge and diverse land mass. The country is not only one of the world’s leading producers of agricultural products, it is also rich in natural resources such as coal and gas.
- Despite the meltdown in 2001-2002 and Ms. Kirchner’s brazen money grabs, the country’s private banking institutions are surprisingly resilient and remain strong.
- An interesting geopolitical angle and risk area has recently emerged. Several U.K. firms are drilling exploratory wells within the territorial waters of the Falkland Islands and the reaction in Argentina has been heated. Now that at least one oil discovery has been reported, this could become even more contentious -- but it could also become the biggest new field since the North Sea.
Those are just some of the storylines in play. Taken together, it all adds up to a period of extraordinary volatility ahead and, for those who understand recent history and ongoing political calculations, short-term investment opportunities.
ADRs in Argentina
The easiest ways to trade this market is through ADRs; as yet, there's no Argentina-specific ETF, and regional portfolios like ILF and GML are hugely overweight Brazil and Mexico. Even LATM only allocates 1.1% of its holdings to Argentina. Big names include steel makers Tenaris (TS) and Ternium (TX), which recently resolved problems surrounding its Venezuelan operations. Local oil major YPF has a world-class exploration portfolio to play with and has been the subject of M&A rumors over the years. The country also boasts its share of large-cap telecom carriers (NTL is the largest by U.S. market cap) and relatively undiscovered banks like BMA.
Disclosure: No positions