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Emerging Perspectives

Argentina: field notes

22 November 2019
Author: Antoon de KlerkPortfolio Manager

The quick view

  • Peronists are back in power in Argentina. This is the political movement in charge before the Macri presidency. Under the leadership of Cristina Fernández de Kirchner, it was associated with the biggest sovereign default on record, the nationalisation of private pensions, price controls and other macroeconomic malaise.
  • This time around, however, the broad Peronist coalition is under the leadership of a more moderate leader: president-elect Alberto Fernández. 
  • Members of the new administration appear well-meaning, but while they are long on theories and grand statements, they are short on concrete plans.
  • Hopes are being pinned on a quick and amicable debt restructure, but a lot will need to go right for the new administration’s debt gameplan to work.

Antoon’s recent trip to Argentina provided some fascinating insights. Here we share some key takeaways.

The new administration has the potential to get things done

The incoming administration will be a broad coalition, so expect slow decision making. But it should have the political muscle to get things done.

Power currently resides with moderate politicians. President-elect Alberto Fernández seems to be calling the shots, rather than Cristina Fernández de Kirchner. Members of the future administration talk of implementing policy on a case-by-case/trial-and-error basis, and it’s not yet clear what they will actually do.

Impressions of key figures

We met with three individuals likely to be given key roles. They are socialists at heart and believe in state intervention in the economy. They appear well-meaning, but it seems that their theories and grand statements are not generally backed up with readily-executable plans. In anything they do attempt, there is clearly considerable execution risk – especially regarding the upcoming negotiations with the IMF and bondholders, and in the aspiration to make coupon payments in December.

Debt: a hopeful gameplan

The current debt gameplan is possible, but it relies on a lot going right: the target is a primary deficit of 1% of GDP in 2020, then the hope is that growth returns sufficiently to make a neutral budget achievable in 2021. The hope is for a quick and amicable restructuring. Sources suggest a principal haircut of 20% and a coupon haircut of 50%, with a 5-year extension of all debt, but this is very speculative.

IMF: wants to help

The IMF representative we spoke to was more positive than expected and “wants to assist”. We estimate that the IMF might be willing to accept a 1% deficit next year and a neutral budget in 2021, provided there are structural changes to pensions and tariffs. However, the US Treasury’s response will be key, and it is difficult to be sure of the IMF’s stance given the political influence on the decision whether to support Argentina’s debt plan.

Read the research notes

 

Emerging market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.

The value of investments, and any income generated from them, can fall as well as rise.

This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual outcomes may differ materially from those stated herein.

Antoon de Klerk
Antoon de Klerk Portfolio Manager

Additional Information:

This material is for informational purposes only and should not be construed as an offer, or solicitation of an offer, to buy or sell securities. All of the views expressed about the markets, securities or companies reflect the personal views of the individual fund manager (or team) named. While opinions stated are honestly held, they are not guarantees and should not be relied on. Investec Asset Management in the normal course of its activities as an international investment manager may already hold or intend to purchase or sell the stocks mentioned on behalf of its clients. The information or opinions provided should not be taken as specific advice on the merits of any investment decision. This content may contain statements about expected or anticipated future events and financial results that are forward-looking in nature and, as a result, are subject to certain risks and uncertainties, such as general economic, market and business conditions, new legislation and regulatory actions, competitive and general economic factors and conditions and the occurrence of unexpected events. Actual results may differ materially from those stated herein. All rights reserved. Issued by Investec Asset Management, issued November 2019.

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