Argentina: The Strong Peso Cometh?

To begin, let us make it clear we have little doubt that Cristina Fernandez de Kirchner, current first lady, will become the next President of Argentina in the vote scheduled for November 2007.

With only 5 months to go before polling day, the incumbent government has still to officially announce which of Los Kirchner will run for the top job. However, informal sources leave little doubt that Cristina will be the candidate for a variety of reasons including Cristina’s high acceptance ratings and good track record as a senator in Buenos Aires province, along with current president Nestor Kirchner’s health concerns and apparent lack of zest for the protocol demanded by the job.

As it happens, the change will probably not raise too many hackles. Argentines take it for granted that a Kirchner kitchen cabinet has been running the show since Nestor came to power. Although Cristina would possibly suffer voter reluctance from a small section of the populace against having a women as president (a remnant of the country’s machismo psyche), polls clearly show that either candidate would only need a first round of voting to be elected. There seems little doubt that whichever Kirchner runs wins.

We would welcome the youthful 54 year old Cristina to the post of President with little reservation. The Kirchner regime has been criticized for their ‘autopilot’ style on economic issues, but overall the last four years has been good to Argentina. Nestor has steered the country away from its traditional Peronist roots (while still out of necessity calling himself a Peronist) and has brought much needed changes to the judicial system amongst other important social issues. All expect a Cristina-led government to continue in the same vein, but we see this ‘change-that-is-no-change’ as an excellent opportunity for the government to tackle the biggest bugbear in its economy, that of inflation. Incidentally she would also bring a breath of fresh air to the dress sense of local leaders, as witnessed by the accompanying photo.


Argentine inflation is officially running at 8.9%. High as that may seem, most observers believe that the official government figures have not merely been massaged, but have been subjected to a deep shiatsu therapy weekend, and they put true estimates at 13-15%. Aside from the political angle, one of the main reasons why a depressed inflation number suits the government is the approximate 40% all Argentine bond papers that are index linked to the headline inflation rate. Simply put, lower inflation equals cheaper government.

However, the smoke ‘n’ mirrors game is wearing a little too thin and we look to this year’s presidential elections to force change on the issue. Cristina’s main opponent in the poll is ex-minister of the economy Roberto Lavagna. Although somewhat lacking in charisma (and opinion poll support), he commands the respect of the Argentines thanks to his part in successfully pulling Argentina out from the slump caused by the 2001/2002 economic meltdown. His main weapon against Los Kirchner will be his vision of the economy, and as inflation is the current Achilles heel will push the issue as much as possible.

The table below shows monthly headline inflation figures, and also features the sensitive food and beverage inflation rates. Tot up the figures, and even the official rates show that food and drink inflation is riding 2% above the general rates, something felt by every household in the country.


Source: Argentina Economy Ministry (MECON)

Pressure will be on the relevant ministries in the next 4 months to keep rates down to the 0.5% averages experienced in the period May to August 2006, else have the year over year figures give the impression of spiralling out of control. There will be plenty of room for Lavagna to make waves amongst those that normally don’t concern themselves with macroeconomic issues. On the other hand, there’s nothing wrong with growth in Argentina. In the graph below, we clearly see the trough of 1q02, followed by the rapid and sustained recovery. Wealth is certainly being created. Latest tax revenue figures show a 32% YoY increase in collections. Exports have flourished under a weak peso, with commodities and auto manufacture leading the charge.

Argentina GDP in Pesos, 1993 to Present image0042.gif

Source: MECON

The next two charts are graphic illustration of how Argentina recovered from the 2002 dog days. By keeping the peso artificially weak through constant Central bank intervention, exports have been given their head. Imports have also risen, but the trade surplus is clear to see and markedly different from the pegged currency days. In a nutshell, Argentina has made and kept itself cheap, and you can supply your own anecdotal example just by asking anyone who has recently spent vacation time in Buenos Aires to hear about the value offered.


Source: MECON

This month in month out approximate $1bn trade surplus has resulted in bank reserves, and lots of them. Central bank reserves stood at a record 39.7Bn on 17th May 2007.

Next, the cheap peso is charted. Argentina’s currency is one of the few in the world that has depreciated versus the US dollar in recent times. While the Loonie and Euro rise, the Peso has stayed at 3.10 against the greenback, all this while Argentina has experienced 8+% growth rates for over 50 consecutive months.

Argentine Peso to US Dollar image008.jpg


In sharp contrast the Brazilian real, featured in the next chart, has been making recent headlines as it stormed under the 2-for-1 level against the dollar:

Brazilian Real to US Dollar



Simple economics has worked until now. The cheap Peso attracts business to the country and boosted the economy at a crucial time. But as inflation becomes the major issue the time is ripe for a change in tack. A stronger local currency would ease inflationary pressure and set the course for a more mature and sustainable growth story in the Argentina of tomorrow. A change of President, however joined at the hip they might be, gives an excellent window if opportunity.

Weak Peso proponents fear that any strengthening of the currency would nip growth in the bud. The case is clear but rather simplistic, and one need only look at Brazil to find an economic success story that continues despite its strengthening currency. Banco Itaú’s chief economist Tomás Málaga recently said that although the Real had appreciated against the Peso, the big difference in inflation rates could result in Brazilians exporting to Argentina itself. We think Málaga hit the nail on the head. With headline inflation of 4.5% Brazil has Argentina beat hands down, and if Brazilians can best Argentine goods on their own turf what about in the rest of the world’s markets?

In the next few months, we expect inflation to be front and centre in Argentine politics. We hope that Lavagna plays his strongest card for all its worth, because if Cristina is forced to address the issue proactively a change of course in monetary policy could well become part of her announced campaign and will certainly be looked at closely as the solution to their inflation woes. It would be a new broom, would mark her presence and maybe most importantly would be very simple to put into operation, as a simple “don’t buy any more dollars” directive to the Central Bank would suffice.

Therefore we look to a Cristina presidency to break from a weak peso policy that helped Argentina lift itself from the depths of economic breakdown to a soaring growth success story in a mere 5 years, but has now served its purpose. As 2006 Nobel economics laureate Edmund Phelps noted in a May 2007 interview with Argentina’s biggest daily newspaper, there is no magic economic recipe that lasts forever and that Argentina should take steps to control inflation before things get any worse. That should resonate with Argentines, as it was the 1-to-1 pegging of the currency to the dollar that first helped them out of a stagflation morass in the early 90s only to bring about its own destruction a long 10 years later.

A final thought. As Shakespeare wrote “To thine own self be true” (pity he got the pompous fool Polonius to say it though). As an equities analyst, it is my duty to point out that a rising Peso would present a wonderful investment opportunity to those so inclined. Not only would there be rising asset value in dollar terms, but many of the larger companies with Argentine exposure still carry large dollar debt baggage from the 2002 default travails. This burden would lighten substantially with a more powerful local currency giving a veritable double whammy effect. From a personal point of view, macroeconomic debate is fascinating but it should also be a means to an end, not just an academic subject. If a new Argentine government does indeed bring with it a new monetary philosophy, there are profits to be made by those suitably informed.

2 Responses to "Argentina: The Strong Peso Cometh?"

  1. Anonymous   May 21, 2007 at 11:52 am

    Is it going to be Nestor or Cristina? Not obvious…he is still very popular and she could run the next time around…   Friday, May 18, 2007 Direct Link:  String of setbacks has Kirchner down in polls but still unbeatable  Argentine president Nestor Kirchner’s public opinion seems to have suffered a bashing in the last twelve months according to reports in the Buenos Aires press following a string of political setbacks for a man accustomed to sweeping victories. The latest polls published indicate that Mr. Kirchner’s standing has dropped to 57%, quite distant from the 75% he enjoyed since taking office in May 2003 and for the following two years.  In the last twelve months the erosion has been of 10 points mainly because of the electoral setback in a poor northern province where he supported the reelection of an incumbent governor defeated by a citizens’ anti corruption/pork barrel alliance under the command of a popular bishop and the blessing of the Catholic Church.  This was followed by the scandal involving the Statistics Office and President Kirchner’s determination in keeping inflation below two digits even if it meant bullying businessmen to accept price limits, temporarily suspending meat, dairy and cereal exports, or outright manipulation of figures.  The office has seen the dismissal and resignation of several top officials and its creditability plummeted, which is extremely damaging for the Kirchner administration in foreign money markets, since the defaulted rescheduled Argentine sovereign bonds now have mostly interest rates linked to inflation and the economy’s expansion.  Every inflation index manipulated half of full percentage point means less interest payments on bonds but alienates the Kirchner administration from international markets or exposes the country’s financial needs to Venezuela’s Hugo Chavez oil-dollars ever willing generosity.  The decision to give teachers a hefty flat basic increase, –in support of his Education Minister running for mayor of the city of Buenos Aires–, only brought havoc since a majority of provinces don’t have the sufficient resources.  This caused a string of strikes and rioting including the most explosive in his own turf, the Patagonian province of Santa Cruz, where he was forced to back step and even remove the governor; a conflict still ongoing and with children out of class now for over two months.  Finally the corruption probe into the Swedish construction company Skanska which was awarded bloated contracts to expand gas pipelines in the midst of a serious energy crisis which the Kirchner administration refuses to admit.  So far two high ranking government officials, one from the energy regulating body and another from the trust financing infrastructure have been sacked for their alleged links to illegal payments and their imminent summons to court. The Kirchner administration argument is that “it’s a deal involving private companies”, but it’s hard for people to swallow the assertion.  A big question mark remains over the whole incident because with special powers voted by Congress, the Kirchner administration is quite free to spend huge budget funds alleging “emergency situations” and a repeat, future or past, can not be absent from the imagination.  With Congressional and presidential elections next October the scenario is not encouraging for the Kirchner administration, but even with diminished public opinion polls, both the president and/or his wife, so far, remain unbeatable for an atomized, tepid opposition. Interviews also show any of the two Kirchners winning in the first round with no need of a run off.  The Poliarquía Consultores poll undertaken in May in Argentina’s main cities shows the president with a 57% support, (12% very good and 45% good); 30% normal and only 11% decisively negative.  Mr. Kirchner is stronger among men (60%), with lower education (64%) and from the interior of the country. At the other end 55% of women back the president; 45% of university graduates and 45% of Buenos Aires city voters.  The total number of interviews was 800, taken in Buenos Aires City, metropolitan Buenos Aires, Cordoba, Rosario, Mendoza and Tucuman, may 1/10 with a plus/minus margin of 3.5%.

  2. Anonymous   May 21, 2007 at 11:54 am

    Not fully clear what your views are on the Peso? Should Argentina let the peso appreciate to control inflation? if so by how much? Any risk of a Dutch Disease?





     We do see the Peso appreciating in 2008, and we see it as the most logical step to take to ease the infationary pressures of today. I deliberately left out any precise forecasts for the Peso going forward, but we would have a target of ArgP$2.40/U$1. Plenty of room for debate over targets and timeframes, and I would welcome further discussion on the issue.

    Dutch disease is a threat under the circumstances, as soft commodities are driving much of the export growth. However as the song goes, “it ain’t necessarily so” and added value production (eg autos as mentioned above) normally soften the inertia caused higher exchange rates. I would point to the 5 years of strong economic growth, low interest rates and strengthening currency in Peru as an example. Worth noting that Peru is not a country that escapes the dutch disease sidebar of corruption, either.

    Mark Turner