Argentina: Macri gets the green light to continue reforms – BBH

Argentine President Macri’s Cambiemos alliance won the mid-term elections which bodes well for the reform effort and the economic outlook, as confirmed by recent S&P’s upgrade to B+, according to analysts at BBH.  

Key Quotes

“The central bank is adding to the orthodox policy mix, surprising the markets with a rate hike last week.”  

“Political Outlook

• Argentina President Mcri’s Cambiemos alliance was the winner of the congressional mid-term elections.  Cambiemos won the five largest electoral districts, including important Buenos Aires province.  There, Macri’s ally Esteban Bullrich defeated ex-President Cristina Fernandez de Kirchner in a victory that should help Macri’s reform agenda advance.  At the national level, Cambiemos won 13 out of 24 provinces with close to 42% of the total vote.
• President Macri has done a commendable job of addressing the economic woes since being elected in October 2015.  He quickly floated the peso and eliminated capital controls.  While these moves were necessary, the resulting inflation, austerity, and recession have dented Macri’s popularity.  Macri just presented another round of economic reforms, taking the opportunity afforded by Cambiemos’ midterm win.  
• Argentina scores low in the World Bank’s Ease of Doing Business rankings (116 out of 190 but up from 118 last year).”  

“Economic Outlook

• The economy is emerging from recession.  GDP growth is forecast by the IMF at 2.5% in both 2017 and 2018 vs. -2.3% in 2016.  GDP rose 2.7% y/y in Q2, the strongest rate since Q3 2015.  Monthly data so far in Q3 suggests growth around 4.5% y/y, and so we see upside risks to the growth forecasts.  
• Price pressures are rising, with CPI accelerating to 24.2% y/y in September from 23.1% in August.  Further acceleration is likely in light of the weak peso.  Historical data is limited since the government only recently unveiled this new CPI measure to replace the flawed one used by the previous Fernandez administration in order to understate inflation.  
• The outlook supports the case for higher rates, and yet markets were surprised that the central hiked rates by 150 bp to 27.75%% last week.  The central bank said that it wanted to counter the gasoline price hikes that just went into effect.  This follows up a 150 bp hike back in April to 26.25%.  We cannot rule out further hikes in early 2018 if the inflation trajectory does not improve.”  

“Investment Outlook

• The peso continues to underperform after an awful 2016.  In 2016, ARS fell -18% vs. USD and was the worst EM performer.  The next worse were TRY (-17%) and MXN (-16%).  So far in 2017, ARS is -10 YTD and is the worst EM performer.  The next worst are TRY (-7%), PHP (-4%), and ZAR (-3%).  Our EM FX model shows the peso to have VERY WEAK fundamentals, so this year’s underperformance is likely to continue.
• Our own sovereign ratings model shows Argentina’s implied rating at B+/B1/B+.  This is consistent with S&P’s decision to upgrade it a notch yesterday to B+ with stable outlook.  The agency noted that “The rating action reflects greater confidence about the government’s political capacity to continue pursuing its economic agenda, resulting in more predictable economic policy and governance.”  We agree.”