Nicholas Cowley, manager of the Latin America sub-portfolios of the International Opportunities and Emerging Markets Opportunities funds for Henderson Global Investors, said the potential rewards available from a recovery are worth considering, though he acknowledged challenges remain.
Recent economic chaos has seen Cristina Kirchner, who succeeded her late husband, Nestor, as President in 2007, resorting to price controls and nationalisations, as well as refusing to pay creditors.
Cowley said that these and similar difficulties have pushed "much needed” foreign investment away. At the same time, the government’s fiscal situation has continued to deteriorate.
Inflation
Moreover, inflation is an immeasurable and major problem in Argentina and officially runs at around 10%. Cowley said the actual figure is estimated at more than double this level. “Fines have been meted out to economists who publish ‘unofficial’ rates," he added.
Dwindling foreign currency reserves also have prompted restrictions on the purchasing of US dollars, and this has caused a boom in black market ‘blue dollar trading’.
"Whilst the official exchange rate is around just shy of six pesos to the US dollar, the blue dollar is closer to 10 pesos, implying a huge devaluation," Cowley highlighted.
Time for a recovery trade?
Despite these difficulties, there are reasons for optimism. October’s mid-term elections reduced Kirchner’s share of the national vote by almost 20 percentage points. This makes it almost impossible for her to change the constitution to allow herself to run for election again in 2015.
At that point Cowley believes, assuming the opposition does not resort to populist rhetoric to garner support, Argentina’s economic policy will be more orthodox, improving its appeal to investors.
Cowley also noted that the country also has some underlying strengths, and is able to benefits from these, notably the fact it is rich in resources and has supportive demographics.
He also recognised the economy will have to go through a "painful process” before it comes out the other side. "The rewards from a recovery in Argentina are tempting, but they are not for the faint of heart," he said.
