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Investors Anxiously Anticipating Argentine Policy Change

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Argentina’s President Cristina Fernandez de Kirchner is recuperating after brain surgery days before a decisive mid-term legislative election that many believe will not go in her favor and as such, will change the course of politics and policy in Argentina going forward.

That change, believe investors including Diego Ferro, portfolio manager at Greylock Capital Management, would be a welcome one for Argentina, both domestically and internationally. Because even though the Argentine economy has been growing decently and is set for a 3.5% GDP growth this year, Fernandez de Kirchner’s numerous interventionist policies through the years have angered Argentina’s private sector and have incurred the wrath of the international financial community—to the point that Argentina has been more or less marginalized from the capital markets.

Fernandez de Kirchner, who succeeded her husband, Nestor Kirchner, as president in 2007, has imposed controls on imports and on foreign exchange and the Argentine peso is greatly overvalued. She also took the decision to nationalize YPF, the country’s leading energy company—a move that angered Argentina’s trade partners and international investors—by expropriating Spain’s stake in it, and she nationalized both Argentina’s private pension system and its main airline.

Also unresolved is the $81 billion in bond debt that Argentina defaulted on in 2001, which was has been through two restructurings.  Although there is talk that Fernandez de Kirchner would seek a third term in office, this would only be possible through a constitutional change and for that, she needs to secure a two-thirds majority, which Ferro doesn’t believe is possible.

Furthermore, “the Kirchners have been running the country in a very personal way, and [Cristina Fernandez de Kirchner] neglected grooming someone who could be her successor, which would have helped her remain influential for the remainder of her presidency,” Ferro said.

With the likelihood of Fernandez de Kirchner losing her hold on Congress, the path is clearing for a shift in policy and a move away from “Kirchnerism,” enroute to the 2015 presidential elections.

“Most people likely to succeed Fernandez de Kirchner to the presidency have a center-right orientation, so the whole approach from here on is likely to be very market-friendly,” Ferro said. “People are feeling very optimistic because much of what’s happening to Argentina is self-inflicted and you would expect that to change as policy changes.”

A shift in policy is mandatory at this juncture because Argentina must rebuild and improve its relationships with international financial markets in order to secure the funds needed to sustain and boost economic growth, according to Sebastian Vargas, an economist who covers Argentina for Barclays Capital.

“The Argentine government has remained distant from external financing and has been able to do so for more of a decade based on the country’s strong domestic savings,” Vargas said. “However, those savings were gradually eroded as domestic consumption continued to expand on the back of genuine growth and because of very expensive fiscal and monetary policy, and the country has had to rely more on its external savings because the government had no relationship with the markets. This means that accessing external financing has been both hard and expensive for corporates, provincial governments and the federal government, even in highly liquid global markets.”

Vargas said that there’s already been some policy change afoot, and not only in terms of recent measures that have been taken to depreciate the value of the peso and stabilize its loss of competitiveness.

“The elections are about governability and the president has two more years to go with a very weak economy and a very low popularity rate,” Vargas said. “In a country like Argentina, which has a history of political and economic volatility, but also has a very strong constitution and political system, the popularity of the president is very important, so in order to maintain governability over the next two years, Fernandez de Kirchner will have to make concessions to the rest of the political system, and I think this has fueled the shift in policies that we are starting to see now and the set the course for a more balanced scenario down the road.”

Although it will take some time for any shifts in policy to be felt in the real economy, Vargas said that there’s an investment opportunity now in Argentine bonds, particularly in municipal bonds like those of the Province of Buenos Aires, and equities, based on the view that politics and policy are changing.

Policy changes will eventually result in a deeper transformation and in that context, Ferro points to opportunities in other parts of the economy, such as the corporate bonds of utilities and other sectors whose futures are closely linked to the direction of policy.

“If policies change, these will do better,” he said.