"THIS IS THE worst day in four years," is the greeting given to Euromoney at the start of a meeting in Buenos Aires on August 4. As the markets in Argentina tumbled it is apparent that, despite the success stories that have come out of the country in the last four years, it is still highly vulnerable.
The August turbulence was the first true test that Argentina has faced since the 2001 crisis and, in many ways, the market didn’t fare well – investors dropped Argentine investments before those anywhere else in the region, even Venezuela. What is Argentina doing to deserve this investor reaction?
This question becomes yet more intriguing when you start talking to bankers in Buenos Aires. "Argentina has been a big opportunity since the 2001 crisis," says Luis Caputo, chairman of Deutsche Bank in Argentina. "Several banks have come back and expanded operations in the past 24 months, the opposite to what happened in 2001 when they all shrank their operations here."
Fabio Saraniti, head of fixed income and products for Santander Rio in Argentina, agrees: "Argentina has been a success story, with good economic growth in the last five years since the crisis," he says. "We are heading to the fifth consecutive year of fiscal surplus and overall economic growth – that has never been seen here before."
With Argentina recording growth rates of an average of 8.8% for four years, and growth of 7% predicted for 2007, it would seem the figures reflect a booming economy. The financial sector also looks more healthy, with solid balance sheets and carefully managed assets and liabilities. "This country and its financial system is in a much more solid position to face a market episode than we were back in 2001," says Sebastián Palla, president of the union of retirement and pension fund administration in Argentina.
On August 21 Merrill Lynch released a report that considered how investors’ perceptions of Argentina are deteriorating. Investors are concerned about remaining financial needs, inflation reporting and fiscal slippage, as well as a lack of financial products and deep capital markets. "The country has been unable to secure a solid investor base, as its new bonds are not part of the major indices (they are issued under local law)," says Merrill.
Regardless of the positive fundamentals in Argentina, the country is still highly exposed to market movements – on August 16 the yield on Argentina’s 8.28% 30-year bonds rose seven basis points to 10.45%, according to JPMorgan. "Lack of investor appetite for Argentine bonds has left the offshore peso rate depressed," says Vladimir Werning, economist for Argentina at JPMorgan.
Economists are still positive – they hope it is just a short-term crisis. But Argentina has suffered the most among Latin American countries in the recent storm – it even underperformed Venezuela in the first two weeks of the turbulence. "It is very clear that Argentina has been penalized a lot more than the other countries in the region and this just highlights that sooner or later we all pay for our mistakes," says Caputo.
Inflation, corruption and wine
From an investor’s point of view, some mistakes, such as fiddling inflation figures, which the national statistics agency has been accused of doing in recent months, are too big to forgive. "Investors have lost interest because they feel they have not been treated properly over the past few months. The manipulation of the CPI and the lack of investment in the energy sector were the most worrisome for the markets’ stability," says one banker. Simon Treacher, bond manager at BlueBay Asset Management, even went so far as to call the effect of these figure changes "a haircut" on the CPI-linked bond prices.
New economy minister, Miguel Peirano, says that the country’s inflation statistics are "trustworthy" and, in turn, the national statistics body Indec (Instituto Nacional de Estadistica y Censos) continues to report surprisingly low figures each month. The July figures, provided by Indec, imply an annual inflation level of 8.6%. But market participants think the rate should be closer to 12%, and the IMF predicts an annual inflation level of 10.3% for 2007. The high predictions are because of fiscal spending of more than 25% of GDP in the past 12 months, and salary increases of 16% for 2007. "I would say that fiscal and wage policy have had a critical impact on inflation," says Martin Redrado, central bank governor of Argentina. "If you consider Chile, they took 12 years to bring inflation under control – it takes time, especially if you are trying to maintain social tranquillity along the way."
But the Indec dispute raises another point that was succinctly made to Euromoney in Buenos Aires by a vineyard owner. "This country is corrupt," he says.
On July 16, Felisa Miceli, the economy minister, resigned under a cloud after $63,300 of unexplained cash was found in her ministry office. She denies any wrongdoing. President Néstor Kirchner has since appointed Peirano as the new economy minister. Then, less than a month later, Kirchner dismissed Claudio Uberti, an Argentine official, after a suitcase with $800,000 in cash in it was found on a plane he was flying on with Venezuelan officials. Eduardo D’Orazio, senior director of Fitch in Argentina agrees with the vineyard owner: "When the new administration is sworn in on December 10 the first thing they should deal with is corruption."
There are even more fundamental questions than corruption, though. Many investors have raised the question, how independent is the central bank? The bankers in Buenos Aires are positive about how the central bank has responded to the market turbulence but Moody’s is worried. In a market report on whether Latin American economies were overheating, released on August 21, the credit rating agency said: "Inflation has been close to 10% in the past few years. [This] can be explained by factors such as the lack of credibility in monetary policy given the absence of an independent central bank, and also by distortions created by supply shortages of some products subject to price controls. In this sense, the Argentinean economy surprisingly does not qualify as an overheated economy." One banker says: "It’s not so much a question of how independent the central bank is, as how independent is anything under this government." The central bank governor says: "On certain tissues, such as the exchange rate, there is not doubt there is coordination between us. But in terms of basic independence then each side should focus on its own job."