Emerging Markets

Argentina's Mauricio Macri puts bad days in the rearview mirror, but a familiar foe looms

Key Points
  • President Mauricio Macri has opened up Argentina's economy and pushed market-friendly reforms.
  • The government expects stronger growth and lower inflation next year.
  • Former President Cristina Fernandez de Kirchner has stoked concerns that she could hamper Macri's efforts.
Argentinian President Mauricio Macri
Getty Images

More and more, it's looking as if Argentina's worst days are in the rearview mirror, a decade and a half after its calamitous sovereign default burned investors and hobbled its economy for years.

Later this month, the government is expected to forecast strong growth and lower inflation for 2018, a testament to the reform-minded agenda of President Mauricio Macri. Since taking office in late 2015, Macri has opened up Argentina's economy and pushed market-friendly policies that have put the country back on track — and earned the good graces of global investors.

With his political support strengthened and markets cheering, Macri appears determined to advance new reforms and build on his successes as his second year in office winds down.

"He has shown his ability to enact deep reforms such as the elimination of capital controls with the liberalization of the exchange rate, removal of export tariffs and controlled pricing, and the implementation of an inflation-targeting regime at the Central Bank," said Joanne Irvine, Aberdeen Standard Investment's head of emerging market equities outside Asia.

According to Andrew Denney, CEO and investment advisor with Prosperity Financial Group, Macri's political and economic victories have been a "huge relief" for a population beaten down by the tumultuous reign of Cristina Fernandez de Kirchner.

Fernandez, who was dogged by corruption accusations and reviled by foreign investors, left the economy in near tatters. The former president is now trying to stage a political comeback and looms large as Macri attempts to consolidate support for his agenda.

Macri "has managed to reduce export tariffs, make great agreements with trading partners on the continent, erased currency controls since their recent bankruptcy and has passed many needed reforms," Denney said.

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

'I would be very defensive'

In the short term, Argentina's economy is shaking off the effects of a prolonged recession it only recently exited, and inflation is mired in the double-digits — hitting 40 percent in 2016.

"Inflation remains sticky, which may hamper growth and corporate earnings. GDP growth has not recovered as promised after nearly two years of Macri's government, which could turn voters against him," Irvine said.

In fact, the country was pointedly snubbed in July by the influential MSCI benchmark equity index, which declined to upgrade Argentina to emerging market status. The decision sparked days of upheaval in Argentine markets, and sent its peso tumbling to a record low.

Looking ahead, there is a slight chance these factors could spell a return to the South American country's troubled economic days, some analysts say.

"I would be very defensive. Argentina is still an emerging market that has much potential to do well or to be a complete catastrophe," Denney told CNBC. "I would stick to broadly diversified Argentina ETFs, and would avoid a heavily concentrated position in Argentina."

Macri is also facing challenges on the political front, as Fernandez's coalition seeks legislative seats. Should the president's Cambiemos Party fail to maintain a working coalition in October's parliamentary elections, it could stall Macri's agenda, upending the economy and unsettling investors. The government's key policy challenge will be its ability to reduce the budget deficit in a country that has become accustomed to fiscal largesse.

Political wild-card

Still, hope abounds that MSCI will eventually change its mind and include Argentina in its index, which would endear its assets further with investors. In the meantime, opportunities do exist for investors, with the energy sector leading the way, according to Jim Barrineau, co-head of emerging market debt with Schroders Investment Management.

Longer term, he added, the most important factor by far will be economic growth. "If this administration can deliver better growth, the prospects for structural improvements will increase greatly," Barrineau said.

Given Macri's positive momentum in the August primaries, a number of market analysts believe investors should be "positively disposed" to Argentine assets, as the president seems likely to consolidate his power. "While some positive results have been priced in, the longer term benefits of stronger congressional support have not been. Argentina is our biggest overweight in dollar bonds for emerging markets," Barrineau added.

And while the peso has slumped this year — falling some 12 percent since mid-June as of late last month — investors stand to do well from the weaker currency and less government intervention.

"Aside from traditional export sectors such as agriculture, mining and oil and gas that should benefit from a weaker peso, the whole economy should do well on the back of greater access to capital and lower borrowing costs," Aberdeen Standard's Irvine said.

— Reuters contributed to this article.