DISRUPTIVE POTENTIAL

The Investor Argentina 2017  I  Finance I Analysis

“EIGHT YEARS AFTER BEING DOWNGRADED TO A FRONTIER MARKET, ARGENTINA SEEMS POISED FOR A TURNAROUND, ONE THAT OFFERS INVESTORS LONG-TERM OPPORTUNITY AND RETURNS.”

Eight years after being downgraded to a frontier market, Argentina seems poised for a turnaround, one that offers investors long-term opportunity and returns. Over the past 30 years, Argentina has dealt with bouts of economic crisis, a prolonged public dispute over its debt repayments, double-digit inflation and a series of political scandals. However, the 2015 presidential victory of Mauricio Macri may mark a turning point, with a focus on reform to revitalize the economy and win back the confidence of investors at home and abroad. According to Morgan Stanley economists, Argentina will fully normalize its economy in the next five years, generating a virtuous cycle that lifts long-term growth as it becomes an investable market. Argentina is now widely considered a long-term investment opportunity for fixed-income and equity investors.

 

Argentina can achieve macroeconomic stability, including a return to emerging-market status, which will affect positively how investors see the country. Morgan’s Stanley base case forecast for the next five years implies an 18% compound annual growth rate for equities, as well as an 8% annual return in the bond market. What’s more, having lost its emerging-market status nearly eight years ago when it effectively defaulted on its sovereign debt, Argentina is on track to rejoin its former cohort on key emerging-market indices by 2018, which would further bolster its prospects. Argentina will achieve a virtuous cycle of economic growth where annual GDP could improve from its recent 0.9% growth rate to 3.1% over the next five years. For these estimations to become a reality, a strong commitment to macro-rebalancing is a necessary condition, especially if harsher global liquidity conditions hit sooner rather than later. 

 

Despite the hangover of the 2014 debt default, Argentina’s current government has made quick and significant strides to address macro imbalances, including: executing a smooth devaluation of currency (the Argentine peso), strengthening foreign-exchange reserves, and eliminating capital and import restrictions, among other steps that are helping to restore confidence in the country’s financial foundations.

 

On the issue of fiscal deficits, Argentina seems to be overcoming its old habit of printing money to cover its deficits. Central bank transfers are expected to have been 2% of GDP in 2016, down from 3.3% of GDP in 2014. The new administration has also made progress toward normalizing regulations within its government energy distribution sector, clamping down on off-shore (tax-free) bank accounts and bolstering private investment. 

 

Argentina’s stock market capitalization is still relatively small. At around USD 61 billion, it’s only 11% of the country’s projected 2016 GDP of USD 538 billion, leaving Argentina with the second smallest equity market capitalization, just above Egypt, in the emerging markets universe. There is ample potential for new issuance, especially in financial and consumer stocks. Investorts believe overall market capitalization in Argentina can more than double over the next five years, if we consider new listings and price gains. Should Argentina regain its emerging market status, perhaps as early as May 2018, it could see USD 1.7 billion in active and passive flows from foreign investors, Morgan Stanley estimates.