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Argentina: In Route to Disaster

|Includes: Arcos Dorados (ARCO), BMA, MELI, YPF

Argentina is a resource rich country in South America that through its history has been unfortunately plagued by incompetent and populist politicians which have stunted its economic growth and numerous times have caused the country to sink into deep economic turmoil, wars and social strife.


During the last 8 years or so the country has been under the presidency of Nestor Kirchner (now deceased) and afterwards by his widow Cristina Fernandez which recently got re-elected. 


During their mandate Argentina has gone through a series of socialist and populist economic reforms that are destroying the free market and thus causing private capital and investment to leave the country.  

Some of the most notable measures taken by the Argentinean government during the last 8 years include: 

- Defaulting on their public debt to foreign creditors causing investors to flee the country and severely hurting Argentina's financial credibility. Getting shut down from international debt market wasn't as damaging as expected because the commodities boom was occurring and thus increased the countries dollar reserves.  At the same time not having to pay debt allowed the government to increase fiscal spending and stimulate the economy.


- Observing that Argentinean exporters were doing very well with the commodity boom, Nestor Kirchner increased taxes on exports. His wife tried to increase taxes to Soy exports to 45% in 2008 causing a massive strike by soy producers.


-Populist measures to reduce inflation such as price controls have been imposed on goods such as milk, beef and flour. Price controls were also set into commodities such as natural gas. Soon this caused shortages on these goods and stopped private investment for increasing production capacity.  The shortage in natural gas caused Argentina to dishonor an agreement with Chile to supply it with this commodity and thus, forcing the neighbor country to import it through container ships at a much higher cost. 

- When the financial crisis hit in 2008, and Cristina Fernandez had assumed as President, the populist reforms actually turned into theft. As commodities crashed during the financial crisis, Argentina found itself short of cash to finance its large fiscal spending and make the payments of its restructured public debt.  The solution was to "nationalize" workers private pension funds to access $30 billion USD. The official excuse was that this was done in order to protect Argentina's workers from losses in the world financial markets.  This occurred in October 2008, selling and nationalizing their assets when the markets were bottoming. These workers will probably never recover the pension funds and will get paid in freshly printed Argentinean Pesos. 


I could continue with a long list of anti free market and economically destructive measures that have been put in place but the result is that Argentina is currently growing its GDP by 9% but annualized inflation reaches 20%.


Since 2007, the Argentinean peso has lost about a third of its value against the US dollar. It has weakened even though there is a commodity boom and the Dollar Index is down 10% during the same time period.


Direct private investment is sharply falling and Argentineans are accumulating dollars fearing another corralito and sharp devaluation of the Argentinean Peso.  The central bank has been trying to stem the fall of the currency by selling dollars.


However, this measure is obviously failing and rapidly depleting the Argentina's Central Bank dollar reserves. 


This has caused President Cristina Fernandez to launch several desperate economic measures that intend to weaken the dollar and avoid capital flight out of the country.


Strict forex exchange controls have been imposed and now banks and money exchanges have to ask permission to the Argentinean treasury before doing a transaction to buy dollars.

At the same time, the Argentinean government mandated that all the foreign assets held by insurance companies must be sold.  The dollars generated by these transactions must be in the country by the end of year.


Last but not least, the government has forced oil, gas and mining companies to cash in all their export revenue on the local foreign-exchange market. This is another attempt to decrease the dollar outflow and force its inflow into the country.


Companies have complained that this will force them to do a double transaction that will raise costs.  When they have to make dollar payments abroad, they will have re buy the dollars they sold and get taxed by these transactions.  Companies could also experiment sharp losses in their cash reserves as the Argentinean Peso will probably continue to tank.


In conclusion, Argentina is in route for another economic and currency collapse.  Forex exchange interventions always fail as the market is much larger than any government and central bank.  


The desperate measures taken by the government only confirm the markets belief that the country is headed for trouble.  With all these measures private investment will continue to dwindle and foreign capital will continue to exit the country. 

It is a pity that such a resource and culturally rich country like Argentina is held back by incompetent politicians.
Here is a list of Argentinean NYSE listed companies which could prove to be juicy shorts if the economic situation begins to unravel in Argentina