Wednesday, November 25, 2015

Foreign investors optimistic about Macri

Further upgrades to Argentina’s credit ratings probably depend on a deal with the so-called ‘vulture’ funds.

Moody’s improves Argentina’s outlook while Barclays says reserves will grow US$5 billion

Key players in the world’s finances are at their most optimistic in a long time regarding Argentina’s business possibilities following Mauricio Macri’s win in Sunday’s presidential runoff.

The country’s credit outlook is rising, while reports from companies’ analysts think the president-elect will be capable of raising the country’s competitiveness and re-order its macroeconomy despite a difficult political and economic context. And although the Buenos Aires’ Stock Market fell in the first two days following Macri’s win, traders think those losses are only short-term.

In a report issued yesterday, one of the two top credit ratings agencies in the world, Moody’s, raised Argentina’s outlook from “neutral” to “positive”, meaning that a rating upgrade could be on the cards soon.

The report said “Mr. Macri has consistently and increasingly made clear his administration’s policies will represent a major market-friendly break from those observed during the last 12 years” and that they expect “Argentina’s policy stance will become more credit positive.”

Moody’s reiterated its consistent stance that Argentina’s potential to move up in its ratings scale depends mainly on reaching an agreement with the so-called “vulture” funds. “A prompt resolution of the holdout saga is a key Macri pledge in this regard, and is required for the government to borrow abroad, which it will probably need to do in order to meet upcoming debt service obligations,” the report said.

But it also predicted other positive reforms from Macri, including “improving the economic and institutional environment over the coming months, through a series of reforms aimed at tackling persistently high levels of inflation and lack of data accountability.”

Standard & Poor’s, the other big credit ratings agency, said the election in itself would have no effect on its ratings. A settlement with holdout bondholders is likely to be needed for that to change.

Financial newspapers, meanwhile, received Macri’s victory positively, with the Wall Street Journal including it in its cover and the Financial Times calling for the mayor to “try to reject the damaging Peronist legacy.”

Other institutions were as optimistic as Moody’s too, with UK’s banking giant Barclays saying “we expect Macri’s administration to win the first battle (over scarce foreign currency reserves) quite quickly, boosting net reserves from the current US$2bn to US$7bn in the first quarter.”

Barclay’s also said that the possibility of the peso’s exchange rate with regards to the dollar could “overshoot” to some degree but that the Central Bank will have enough tools to limit the scope of that problem.

Overshooting refers to the possibility of the dollar’s value soaring above its market equilibrium rate after being freed by the Central Bank, due to panic runs against the peso.

Short term vs long term

Macri also has the possibility of raising interest rates in order to limit the “pass-through” effect of a devaluation to inflation, Barclay’s said.

But raising interest rates and declining consumption is likely to have negative effects in the short term.

According to Barclays, “in terms of growth, we expect a decline of 1.1 percent in 2016, as a result of falls in real income related to the potential pass-through effects of a devaluation and fiscal adjustment.”

By 2017, however, a strong 3.5 percent growth rate was predicted due to “positive-supply side effects following from much-needed adjustments,” with further improvements in the future.

As for markets, Monday’s five percent decline in Buenos Aires’ benchmark Merval index was seen as an exception rather than a norm that could continue. Yesterday, the index was stable, falling by just 0.4 percent.

A US-based investor told the Herald that profit-taking after the big gains stocks posted in the past month is taking place, but that it should be “short term.”

“Argentina is so smart and has so much potential. Macri can fix the problems it has. People want to loan it the money it needs,” the investor said.

Overall, the country is seen as needing capital to spur growth again, and capital managers are expressing interest in the country, as hardly any other emerging countries offer the same potential rates of return as Argentina does now.

A minority of analysts, however, are warning about the need to be cautious, recalling that other Latin American countries (including Argentina in the 1990s, and more lately Brazil) were seen as poster childrenfor growth, attracting massive amounts of capital that didn’t necessarily turn into development and ended up spurring big crises when they left.

Herald staff