The Argentine economy shrank 3.7% year-on-year in September according to government figures, the seventh straight month of contraction.
Argentina’s recovery was designed to be investment-driven, and the fact that growth needs to pick up rapidly for the country to be able to support the more than US$19bn worth of sovereign debt issued so far this year means that the drawn-out recession has begun to weigh on investor sentiment.
“There is a bit of disappointment and concern regarding the outlook for Argentine growth,” said Alfredo Mordezki, Head of Latin America Fixed Income at Santander Asset Management.
However, he added that such figures were not significant at present, noting that during the general EM selloff following the US election, Argentine credits performed very well.
Strong investor confidence in Argentina is arguably down to prudent government policy. “The government has made some impressive changes in normalising the economy and capital flows. Corporate issuances this year have all been oversubscribed, not to mention issuances by the sovereign and provinces, so the appetite is clearly there,” stated Alan Glass, Partner at Buenos Aires Advisors.
He added that expectations of improving performance clearly remain. “There is a ‘wait and see’ mentality surrounding how government-implemented changes will impact the economy going forward.”
Although Argentina’s economic recovery has been slower than expected, soon-to-be introduced reforms will improve the outlook for growth, keeping investors bought into the ‘Argentina story’.
Amongst these reforms is the tax amnesty, which should see funds held abroad flow back into the country. Mordezki noted that there are not expected to be any net capital outflows for the next two to three months, which is when the amnesty is set to be introduced.
Glass noted that the government is trying to change the rules of the game. “They are trying to make the country’s markets much more transparent, market, and investment friendly, and these changes can take more time than expected, but they are ongoing.”
“We are optimistic these changes will occur, which will again drive significant interest from investors,” he added.
While there has not yet been much material improvement in the dynamics of the commercial, retail, services and industrial sectors, the energy sector is performing increasingly well, with increasingly volumes of investment committed.
The strong performance of the energy space can be attributed to the fact that the government is implementing the biggest infrastructure programme in the country’s history, as well as pushing through a PPP law that will help infrastructure and energy projects.
Nevertheless, a pick-up in the Argentine economy will need to occur by Q2 2017. This is not only necessary for investors to stand by Argentina, but also for Macri to demonstrate degree of an economic turnaround before the October 2017 mid-term elections.
“Macri is not facing a particularly large ‘extreme’ opposition. The largest opposition group he faces is more moderate, so even if the election does not go his way, investors are unlikely to be spooked,” Mordezki said.
Glass added that the polls show that despite the recession – with people less well-off than they were a year ago – there is still significant optimism around the country’s economic outlook, and that Macri has a high support rating amongst the population in spite of the recession.
