Argentina’s government recently increased its forecast for economic growth to almost 5% growth in 2013, even as other emerging markets stall out. Yet the country is hardly what investors would call a safe haven. Argentina suffers from 25% annual inflation, and the prospect looms of a technical sovereign default stemming from the government’s refusal to settle with holdout creditors from the 2001 economic collapse. So what accounts for the strong performance of the Argentine economy? In recent weeks a number of factors have converged to inspire confidence.
At the center of Argentina’s bounce is Vaca Muerte, the “Dead Cow,” estimated to be the third-largest shale gas field in the world. In April 2012 President Cristina Fernandez de Kirchner hastily departed from a Summit of the Americas conference, where Argentina’s claims to the Falkland Islands were greeted by muted stares, and within hours of her return to Buenos Aires announced the nationalization of YPF, the gas company overseeing drilling at Vaca Muerte.
As the president proclaimed that YPF represented a new era of “resource sovereignty” in Argentina, investors shuddered. But even at the time of the takeover there was a widespread recognition that Fernandez eventually would have to eat her words and partner up YPF with foreign gas companies.
The End of the Kirchner Era
Argentina lacks the expertise and equipment for large-scale fracking, and though it may sound like a decent strategy to squat over the site as the value of the gas increases, the fact is Argentina’s gas imports have grown swiftly since 2012.
So even if a reversal was inevitable, it still proved a bit of a surprise when, in mid-July, YPF announced that Chevron would invest $1.5 billion to extract gas at Vaca Muerte. In return, Argentina will allow the US company to export a quintile of the oil and gas it recovers tax-free. Argentina’s stock market, the Merval, promptly rallied, and it now hovers near all-time highs.
On July 23, the IMF performed its own pirouette, and decided not to file a friend-of-court brief to the US Supreme Court regarding Argentina’s legal battle with holdout creditors. It is widely thought that the IMF brief would have significantly increased the likelihood of the Court hearing the case, perhaps rendering a decision in mid-2014 that would throw Argentina back into default and set a precedent that would have made it more difficult for other countries to negotiate with creditors.
Finally, local elections held on August 11 limned the end of Kirchner era in Argentina. Although the president’s Front for Victory won more races than any other party, Argentina’s opposition parties picked up enough seats in Buenos Aires and several far-off locales to all but guarantee that Fernandez’s supporters will not gain a two-thirds majority in October’s legislative election. And without that margin they will not be able to pass a constitutional amendment allowing the president to run for a third term in 2014.
Still, Argentina’s opposition parties have yet to congeal. Currently Sergio Massa, who trounced the Fernandez-backed candidate in Buenos Aires, appears the darling of the opposition, but he was a government minister until June. The hope is that things aren’t going to get worse, and perhaps the 2014 presidential election will bring a reformer to the Casa Rosada, even if it isn’t clear yet who that reformer may be.
Gloomy Economic Forecast
Occasionally, beat-down stocks experience a brief recovery in share price. “Even a dead cat will bounce if dropped from high up” goes the typically gruesome Wall Street quip. A similar process appears to be playing out on a national scale in Argentina. Fernandez’s ability to rule by decree may well have ended when the results of the August election came in, and it is now clear that she will leave office next year.
Yet there is no end in sight to 25% inflation, which is driving a demand for dollars that increases the odds of a currency crisis as the peso weakens and Argentina draws down its reserve of greenbacks. Meanwhile Argentina’s key commodities—wheat and soybeans—are declining in price. Capital Economics forecasts that Argentina’s economy could enter recession next year.
Slowly Argentina is becoming a more predictable, if still difficult, place to do business. Call this a “Dead Cow bounce.”