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Fresh start for Argentina: Investors say Argentina is the bright spot in Latin America as President Mauricio Macri ends 15-year long dispute with hedge funds and gets serious about economic reform

Annabelle Williams
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Argentina Faces First Presidential Runoff In Its History
President Mauricio Macri's reform agenda has impressed investors (Source: Getty)

The land of beef, red wine, ranches and hinterland. Argentina is on the cusp of great change.

The combination of a newly elected pro-change President, Mauricio Macri, and the resolution of a nearly 15-year long dispute with international lenders both mean Argentina is going to draw a line under its checkered past.

Experts are now tipping Argentina as one of the most promising investment opportunities in the region.

Compared to Brazil and Venezuela, Argentina’s in pretty good nick. Brazil has been battling a huge corruption scandal at state-run oil company Petrobras, where billions of dollars were allegedly embezzled for the benefit of the business and political elite. Venezuela has sunk from being the wealthiest country in Latin America to a place where condoms cost $20 each and there are massive queues for basic goods.

Read more: Credit crunch fears grow in Brazil

But Argentina has had its own struggles, and the deep recession in next-door Brazil has hurt it too.

Argentina’s GDP growth last year was 1.7 per cent, a decent rate given the global enviroment is slow. But in 2010 Argentina’s economy was steaming ahead with 9.5 per cent growth, a by-product of the commodities boom which was still going. Inflation has been slightly crazy, as consumer prices in Buenos Aires rose nearly 30 per cent year-on-year this January.

“Argentina’s economy is not in a bad state. In the past it has been a fairly well-developed country... But there has been huge underinvestment in recent years,” explains Dominic Bokor-Ingram of Charlemagne Capital.

But the resolution of a battle which dates back to 2001 could mark a new start for Argentina. A tentative deal was announced last week and the stock market cheered, as the Merval index jumped 8 per cent.

THE BATTLE

Hedge funds bought up Argentinian government bonds when the economy collapsed in 2001. In the years since, investors have been embroiled in a protracted battle with the government over repayment of the bonds. Argentina wanted investors to take a “haircut”, and get back less than they originally invested. Former President Cristina Fernandez de Kirchner refused to negotiate, calling them “vultures” – and her nationalist stance was welcomed by ordinary Argentinians.

But now President Macri, who was sworn in in December, has changed tack. He took a more conciliatory tone with the final lenders who were still holding out (some had reached agreement with Argentina over the years).

Now the country will return $4.65bn to lenders, which translates into them receiving back around 75 per cent of the capital they initially loaned to Argentina. Other creditors still have to accept the offer. “A deal would undoubtedly be positive for Argentina’s economy,” says Edward Glossop of Capital Economics.

NEW LEADERSHIP

To international investors, resolving this dispute reflects well on President Macri­­ – although it may come at a political cost at home, since some Argentineans see him as backing down. Macri has also impressed global investors by pressing on with an ambitious range of market-friendly measures to boost the flagging economy and open it up to the world.

Investment-wise, Argentina has been “isolated”, says Sandra Crowl of Carmignac, as the international community couldn’t trust it would pay back its debts.

“The unexpected election of opposition candidate Macri was a clear positive for the country and might bring an end to a dark period of isolation since its default in 2001,” she says. “Argentina has been the positive surprise of 2016.”

BETTER TIMES AHEAD

Throughout the 15-year stalemate, Argentina has had to pay double what its Latin American neighbours do (around 5 per cent) to borrow on the world market. This has crippled its ability to invest in infrastructure and other social goods. It was once one of the most advanced Latin American nations with a high standard of living, but has since fallen behind.

The main outcome of Macri’s deal is the potential for Argentina to borrow on the international debt markets at a more affordable rate – something which will be invaluable for the country which needs greater spending and investment.

Argentina could also shrug off its lowly D credit rating. “It would fully unwind the default that dates back to 2001,” says Rob Drijkoningen of Neuberger Berman, effectively giving Argentina a fresh start. He says the risks of investing in Argentina’s government debt are much reduced.

Crowl says that after years of caution there are now opportunities in Argentinean stock markets.

She highlights MercadoLibre, the undisputed leader of e-commerce throughout Latin America, as one stock which could do well as the economy recovers. “MercadoLibre offers solid growth prospects and has prime positioning across all of Latin America,” she explains.

Crowl has also invested in a real estate firm, IRSA and a company with extensive agricultural land, Cresud. These companies both stand to gain from government changes to tax on exports and the lifting of capital controls.

Banks and utility companies are the sectors of choice for Charlemagne Capital’s Bokor-Ingram, as he says these are both the kinds of sectors which will be the biggest beneficiaries of the economy opening up.

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