I don't normally excerpt the weekend's edition of The IKN Weekly twice, but in this case I'll make an exception as this piece has been requested on the open blog by A. Mailer for their own reasons (that are fair enough). So here you go.
Argentina: Beware inflation (again)
The message about Argentina here at The IKN Weekly has been consistent: Yes there is new interest about the country since Macri took over, but fools rush in where angels fear to tread and the reforms he wants to push through have no guarantee of success.
We’ve also been pointing at the key datapoint you need to follow for almost a year, long before it got popular in the trade press. Macri needs to lower inflation and he and his team have always set “the second half of 2016” as their target for this. The reason is simple enough: Under Cristina Fernández de Kirchner inflation was always high, but large percentage pay increases saw the purchasing power of the average Argentine keep pace with prices. This isn’t a sustainable situation in the long-term and leads to real hyperinflation problems (see Venezuela), but it can keep things stable in the medium-term and nearly always longer than orthodox economists claim. But under Macri salary rises have been largely crimped, so inflation needs to come down quickly because if not, Argentina suddenly becomes poor in Peso terms (which is what counts when you’re in the supermarket).
That’s the VERY basic outline, now for the rub because doubts are now arising about this fight against inflation, here are a couple of links for your consideration.
Here in this Reuters report (14) last week, the local bigwig for JP Morgan, Facundo Gómez Minujin, said the following (translated):
“For this year we see inflation at 42% and then for next year 21%. And it’s difficult to change that trend. It’s difficult to lower inflation by much, especially next year when there are elections”.
By that, he’s referring to the round of Congressional mid-term elections when a lot of the seats in the national parliament are up for grabs. This will be the first big test of the results of the Macri government policies. The assumption is that the hardline macro/fiscal policy will have to be softened for a period and more populist policies offered to give the Macri government a chance of doing well. I needn’t tell this audience of the potential dangers being baked into the pie. As a sidebar, it’s also easy to argue that “21% for 2017” is rather optimistic as well, rose-tinted specs from someone who wants Macri to do well.
Meanwhile this article in The Economist (15) last week suggested that the Macri honeymoon period is coming to an end and also focussed on the price inflation/salary see-saw as key. Here’s an excerpt from the piece, plus one of its visuals:
Mr Macri has reservoirs of political strength and popular goodwill to draw on. Though Argentines are angry, most still blame the Kirchners for their hardship. Allegations of corruption have enfeebled Ms Fernández as a political force. A new generation of politicians is competing to become the next presidential candidate of her Peronist party, weakening its ability to provide opposition to the government.
But Mr Macri’s honeymoon is coming to an end (see chart). With legislative elections due in October 2017, “the government needs to show some economic results in the first quarter of next year,” argues Juan Cruz Díaz of Cefeidas Group, an advisory firm. The IMF thinks the economy will rebound in 2017; it forecasts growth of 2.8%.
My only argument with the above is this line, “Though Argentines are angry, most still blame the Kirchners for their hardship”, because “most” is way too strong and “some” is a more accurate image (please recall the decade-long hatred The Economist showed for the Kirchnerist governments, they’re anything but unbiased). It’s also notable how political commentators (largely sympathetic to the Macri cause) are starting to shift the time window to “the first quarter of 2017”, even though Macri ran and won his election of “second half of 2016” as the critical period when the sacrifices he demanded of Argentines would start to bear fruits. Add in this CEOP poll that shows 7 out of10 Argentines unhappy with their personal economy and opposition popularity at 47% versus Macri government popularity down to 33% (15a) and the scene is set for the big fight to come. Argentina the political beast has always been sensitive to its economic well-being, so if Macri does turn things around in the next two quarters we may be witnessing the low point of his acceptance ratings. If he doesn’t I can guarantee this audience, as day follows night, they’re going to get a lot worse.
The bottom line: The song remains the same, be very careful of Argentina exposure, ladies and gentlemen. Yes there are opportunities there, in our focus sector of mining and others, but the risks are much higher than the promoters of the country and its concession land would have you believe. Take for example one scenario in which we see large-scale protests building in the first and second quarters of 2017, then the CFK end of the political spectrum doing well in the 2017 mid-terms and wresting control (total or partial) away from Macri in congress. Attitudes towards the country would quickly return to “Ah well, they’ve been FUBAR forever anyway, at least we serious people tried...” and the FDI that Macri needs to complete his economic turnaround won’t happen and that statement very much includes those mining projects we all like to talk about.
As I put it to one person last week, a historic window of opportunity tends to come around in Argentina mining from cycle to cycle and that window is right now...for people wanting to sell. Be it land, projects or concessions, you get interest from opportunistic buyers and that grows into a fully-fledged seller’s market. People owning mining assets in Argentina have the chance to book safe profits on previous investments right here right now in 2016. But the issue is 2017, because if they hold on to their land assets for a while longer those profits might be even higher next year, Macri starts turning Argentina around meaningfully and the buying interest becomes a feeding frenzy. But if things go wrong next year, the window will suddenly slam shut as it’s done so many times before. Risk/reward is favourable today, but could go badly out of balance in the near future.