Emerging Markets

Goodbye Fernandez, hello Macri: For investors, no more crying for Argentina?

Argentina's President Mauricio Macri waves after being sworn-in as president at Casa Rosada Presidential Palace in Buenos Aires, Argentina, December 10, 2015.
Marcos Brindicci | Reuters

After surviving a contentious election, Argentina's newly elected president is set to inherit an economy in tatters, a faltering currency and international arbitration over debts running in the billions of dollars.

Although the road ahead will be tough to navigate, many observers are hopeful Macri's policies can distance the country from those of his combative predecessor, Cristina Fernandez de Kirchner. Analysts and investors are reasonably optimistic that the center-right president with a pro-business bent can repair much of the economic and diplomatic damage to Latin America's third-largest economy.

After Macri ended 12 years of Peronist-run governments under Fernandez and her late husband, Nestor Kirchner, the first order of business will be a potential debt deal, the legacy of Argentina's 2001 economic meltdown that triggered a default on $100 billion worth of sovereign debt — the largest in history. A protracted legal battle and a stalemate with Fernandez all but forced the country back into default last year.

A new agreement could allow the country to tap markets anew and boost its hard currency reserves, which are in short supply.

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"Macri has a very strong chance of settling this issue, mainly because he has the political will to do so and enjoys the trust of the markets," said Jimena Blanco, head of Americas with global risk and strategy consultancy Maplecroft.

Blanco told CNBC that Argentina's main barrier to getting over its debt hump are the New York-based holdout bondholders, who have judgments worth $2.4 billion.

Given the recent expiration of a bond exchange clause, Macri "is in a position to offer the holdouts a much better deal than Fernandez could have done" just last year.

With Fernandez gone, "Macri might well … put this to bed once and for all," though a full repayment may be too politically costly, Blanco said.

Mauricio Macri Presidential Candidate for Cambiemos celebrates waving an Argentina flag after the general elections at Cambiemos Bunker on October 25, 2015 in Buenos Aires, Argentina.
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However, investors have been encouraged by early signals from Macri, who was sworn in Thursday. He has telegraphed that Argentina will abide by established rules, and treat investors equally — unlike his predecessor, who was notorious for changing laws suddenly and took populist stances against foreign investors.

"Macri's emphasis on market-friendly reforms is also evident through his cabinet choices," DLA Piper partner Francisco Cerezo wrote in a recent analysis.

"He has already announced a plan to break down the traditionally strong Ministry of Economy into six different ministries, and has named individuals with extensive economic backgrounds to head several key posts" that include the finance, transportation and energy ministries, Cerezo added.

The first widely reported appointment by Macri is Alfonso Prat-Gray as finance minister. In an interview this month with La Nacion, the incoming finance minister made what some market analysts viewed as "important statements" about short-term economic policies.

"We think that his comments are steps in the right direction and indicate pragmatism, in that they seek a solution to economic problems while addressing restrictions imposed by social, political, and economic realities," Barclays Investment Bank economist Pilar Tavella wrote in a note to clients last week. Barclays expects that currency controls "will be fully dismantled after some replenishment of central bank liquidity."

Argentina's President Cristina Fernandez de Kirchner inspects Chinese honor guards during a welcoming ceremony hosted by China's President Xi Jinping in Beijing, Feb. 4, 2015.
Kim Kyung-Hoon | Reuters

The Argentine peso has fallen so low this year that some businesses (most recently American Airlines) will not accept payments with the official currency.

The peso is one of the worst performers across emerging markets currencies, with the official rate having shed more than 12 percent this year against the U.S. dollar. Foreign reserves, meanwhile, plunged by more than $6 billion in October, leading to a shortage of dollars.

Accordingly, Prat-Gay told La Nacion that a more liberal exchange policy may be in the cards. Foreign exchange liberalization is in the cards. Such a move could help minimize currency risk in an economy that frequently combats double-digit inflation, and has an official and black market exchange rate.

"We think it's likely that the next government will have to speed up the pace of nominal depreciation, as the current situation simply cannot be maintained with foreign reserves reaching critical levels," investment bank Brown Brothers Harriman said.

Still, optimism is building around Macri, who for now has the credibility his predecessor lacked. Late last month, after the election results became clear that Macri would defeat Fernandez' hand-picked candidate, Daniel Scioli, ratings agency Moody's Investors Service raised the outlook on Argentina's credit rating to positive from stable, stating the improved possibility of "credit positive" policies being implemented.

"Multilateral organizations and corporate investors have already stated publicly that they will collaborate with the new administration," Maplecroft's Blanco said. In addition, "the cabinet will have the political backing of the president to implement the most economically sound policies, based on the consensus of the members of the economic cabinet."