Investing in Argentina? Avoid it Like the Plague
By Martin Hutchinson
If you were looking for the country with the worst economic policy of the last 20 years, your search would stop with Argentina.
Since 2002 alone, Argentina has:
- Defaulted on both its foreign debt and its energy-supply deals with Chile;
- Has introduced price controls and subsidies on energy costs;
- Has robbed its local depositors and banks;
- And has taxed exports and manipulated inflation statistics.
But here’s the real stunner: Even with all this turmoil, investors who bought into Venezuela in 2002 have pretty much found it to be the very best investment in the world.
The Merval Stock Index is up 565% in the last 5 years. And Argentine economic growth has averaged more than 7% per annum over the same period.
I mean, imagine how rich you’d feel if you suddenly could just stop paying your mortgage—even as you continued to receive hefty raises at work.
Agent of Change
Much to everybody’s surprise, an opposition businessman, Mauricio Macri, won the June 24 election for mayor of Buenos Aires, with about 60% of the vote. That suggests that the economic-fruitcake President Nestor Kirchner may be on the way out at the Presidential election in October, whether he runs for a second term, or his wife runs instead.
If the opposition wins in October, it’s likely that Argentina will institute much better economic policies, rejoin the world community, pay its debts, encourage foreign investment and begin the road back to solid economic growth.
Since the place is currently poorer in absolute terms than it was in 1930, it’s about time.
So now’s the time to invest in Argentina, correct?
Absolutely not.
Let me explain …
Argentina: An Investor Catastrophe Just Waiting to Happen
First, it’s important to understand just why Macri won the Buenos Aires mayoral election is that the wheels are beginning to fall off the populist-economics cart. Inflation is well above 10%, and is climbing. And the Argentinean people know it, too – no matter how the government tries to cook the figures.
Gas and electricity shortages have appeared, because the owners of Argentine utilities haven’t invested in their facilities for several years, meaning output is constrained. But why should utilities invest when the government holds prices down so low that power producers can’t make a profit?
Unfortunately, fixing these problems will mean that any incoming administration will have to raise interest rates, allow energy prices to rise to a “real” free-market level, and restrain the overall economy.
Even though these are the right policies in the long run, they will cause a horrid crunch in the short term:
- Stocks and real estate will crash; that’s almost always the fallout from big increases in interest rates.
- Consumer spending will drop; substantial decreases in household wealth will certainly have that effect.
- Businesses will have to cut costs; with higher tax and energy expenses, companies will have to cut back on their payroll costs, which means fewer workers, and probably reduced wages for those who get to stay on.
And there’s more.
For starters, just consider the Argentine voter. He endured a nasty recession in 1998-2001, as the government tried to stave off a default. He’s enjoyed five great years since then, benefiting from
populist economic policies. But over the next few years – if an economically sound government is elected, the voter will endure another horrid recession, with all its terrible effects.
Guess which way he’ll vote next time around? You’ll be able to extol the long-term virtues of sound economic policies until the cows come home, but if he’s watched as populism brings growth and sound policies bring pain, you can bet your last (devalued) Argentinean peso that he’ll back the Silly Part every time from here on out.
Under this scenario, needless to say, Argentina will keep getting poorer and poorer. Now, one could make the case that the populist and profligate years under General Juan Peron in 1945-55 caused the problem in the first place (http://www.fsmitha.com/h2/ch24u.html): Once Peron was ousted, the opposition had to clean up the economic mess, which was very painful.
So if you like Argentina, and are thinking of investing there, there are two conclusions to reach:
- It’s much better for the populist left to win the next election, because then the oncoming chaos clearly will be their fault; and …
- The best time to invest in Argentina is when its economic policy has become really disastrous.
After all, who said emerging-markets investing was easy?
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