Argentina: a silver lining for investors in South America.

Author:De Haro, Jose Luis
Position:ARGENTINA INVESTMENTS
 
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Less than a year after Mauricio Macri dethroned Cristina Fernandez de Kirchner and became the new tenant of the Pink House, investors worldwide have trained their sights on Argentina. While neighboring Brazil, Latin America's biggest economy, battles its worst recession in decades in the midst of a political crisis and social unrest, Argentina's center-right government is moving full speed ahead introducing structural economic and political changes.

Macri's administration has sent clear market-friendly signals by eliminating distortions such as an unreal official exchange rate and unsustainable subsidies on utilities.

The Argentine Merval index has gained over 34% during the last year up to the first week of September while the Brazilian BM&FBovespa, Latin America's biggest equity index, is up 22.9% in the last 12 months.

The government has implemented necessary measures to secure the interest of foreign investors in the country, even while the economy suffers a mild recession. Since Macri took control, the value of the peso stabilized and its fluctuations have been maintained within manageable limits. Significantly, the sovereign debt default of 2001 has been settled, paving the way for Argentina to raise funds on international markets.

Other administration actions to bring order to the economy include dramatic increases of 300% and more in tariffs for gas, electricity, and water, with the aim of reducing subsidies and improving fiscal health. But, this move has been temporarily stopped by the Supreme Court which is considering the social impact of the price hikes.

These reforms have not been without cost. Inflation and the tariff increases have caused deep y malaise among the population.

MARKET OPTIMISM

The stock market is optimistic about Argentina's outlook but is still struggling with low liquidity and valuations. Even so, foreign investors are tracking events with keen interest.

"Access to the Argentine market is making the country less idiosyncratic, and more subject to global trends than it was in the past," says Eric Fine, portfolio manager at VanEck, an investment management firm with over 25 billion dollars under management. "The fact that the country is issuing debt, borrowing more from overseas, especially in the near term, and is easing restrictions on capital flows makes the country more systematic than before," he adds.

Nowadays it seems that the confluence of macro, fiscal, and monetary policy plus the implementation of the...

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