Argentina seems back on track…

By Stéphane Monier Chief Investment Officer Lombard Odier Private Bank

In our CIO Flash Bulletin “Is Argentina back on track?” published last month, we discussed the positive economic fundamentals and the outlook for reforms. In our view, Argentina is recovering and the country has good potential for growth. After a symbolic victory in primary elections held in August, the current administration is further strengthened after the mid-term elections held last Sunday 22 October 2017.

With the ruling Cambiemos coalition on track to win approximately 41% of votes in the lower house of representatives nationwide, we can consider October 2017 midterm legislative elections in Argentina to be a large victory for the alliance. As a result, the composition of the Congress will now be more favorable for Cambiemos, should strengthen President Macri, and obviously bodes well for the administration’s reform efforts while boosting investors’ confidence.

Indeed, the Macri administration will now be able to build strong coalitions to support key legislation in order to pass and implement tax, labor market and capital markets reforms. In addition, reduced uncertainty regarding the continuity of market-friendly policies should support investment, ensuring sustainable growth and sovereign credit ratings.

Going forward, this development, along with continued divisions within the opposition, increases the probability that Macri or another Cambiemos candidate could win the 2019 presidential election.

In a nutshell, Argentina is on the right path, business confidence is growing and the country has good potential for growth. The main challenge that Mauricio Macri faces is to achieve economic normalisation by minting the disinflation process, by attracting foreign investments and by maintaining his popularity until the next presidential elections in 2019.

Back in early September, we were positive on local rates as a means of accessing the positive cycle in Argentina. Since then, the Argentine peso remained unchanged against the US dollar while Argentina Bonar 2020 bonds have risen by 7.9%¹. We continue to believe that inflation-linked bonds and floating-rate debt may represent the more interesting opportunities due to our expectations that the Argentine peso will appreciate and given that nominal yields are still high².

¹ Source: Bloomberg, 24 October 2017
² The ARS-denominated sovereign curve is inverted. The 1-year tenor benchmark is currently trading around the 20% mark. Source: Bloomberg, Lombard Odier 24 October 2017