Everyone Has the Argentine Economy Wrong

They lead the chants, manage the supporters, unfold the flags and sell the choripán sandwiches. But the Barras Bravas — tough gangs — aren’t your average football fan club. They’re the reason why violence, perpetrated by an army of barra soldiers pumped up on drugs and cheap beers, has become an integral part of Argentine football.

The first time I worked in Argentina, I had a football column for a local English-language paper. At the time football violence was getting out of hand, so I was asked to write a piece on the Barra Brava gangs that were causing the trouble. What I discovered was a powerful football mafia network. Why would they want to control football clubs? Because of the chance to launder money, or make more from selling star players — a market worth $228 million in the first half of 2013 alone.

Many people believe that the rest of the Argentine economy is just as corrupt and risky as its football business. Bill Bonner, the founder of Agora inc. (the company which publishes Money Morning), for one, is famously bearish on Argentina.

Disagreeing with your boss is never a particularly smart career move — but sometimes you have no choice. While I respect Bill for carving out a huge international media empire — and making very many prescient investment calls along the way — I think he’s got this one wrong. On average, my Argentine tips are up by around 20% since I first started writing about them, and I think that brave investors, who are prepared to go against the consensus, could stand to make more in the future.

Argentina’s ‘century of decline’

Bill’s not the only one beating up on Argentina at the moment. A recent cover story from The Economist asked what other countries could learn from a ‘century of decline’, while most other mainstream financial media have a similarly bearish view on the place. And to be fair, when you have lived and worked in Argentina like I have, you can understand why it has so many critics.

I’ve already mentioned corruption in football but in my various spells in Argentina, I came across plenty more examples of the corruption that plagues the country and stops it fulfilling its true potential. I always remember when a friend of mine, who’d just graduated from a top university in Buenos Aires, found that he’d landed his dream political job. The post was his but only if he agreed to give the guy who was fixing it for him 10% of his wage for the rest of his career. ‘Don’t worry’, said his fixer, ‘you can make it back in the future when you help someone get a job.’ When idealistic young graduates are forced to accept corruption at that stage of their working lives, it doesn’t bode well for the rest of the system.

But the corruption doesn’t just concern politics; it pervades almost everything else.

These are just anecdotal examples of course. But they’re backed up by more comprehensive evidence. Transparency International ranks the country 106th out of 177 in its Corruptions Perceptions Index, while the World Bank scores it 126 out of 188 when it comes to the ease of doing business. Corruption happens everywhere but the fact that it is so endemic in Argentina is one reason that the country hasn’t always made the most of its incredible natural resources.

Another problem has been erratic swings in policymaking that have discouraged investment. In just two decades, investors in the country went from the ‘privatise everything that moves’ era of Argentine President Carlos Menem, to the more recent wave of nationalisations, import taxes and price controls. Ultimately, the Argentines are free to choose whatever system they like — and both can deliver prosperity. Moreover, large institutional investors or multinationals aren’t afraid of risk. Many are invested in countries that are far less appealing than Argentina. But the one thing they really dislike is uncertainty. And in recent years, there has been way too much of that in Argentina.

In a later spell in the country, when I worked for an oil magazine out there, I used to speak to oilmen that were fuming with the government. They had gone out and made investments under one set of conditions but then the rules of the game had been changed completely. As they pointed out, it ended up being a lose-lose situation because when the investments dried up, neither the government nor the energy firms were making any money.

Oil, gas and debt markets: the road to recovery

If you’ve read this far you’ll be wondering why I still see an opportunity. Well, I’ll be honest. I don’t see the corruption issue being solved anytime soon. Yet, as I’ve been writing for a while now, there are signs of a shift in policy.

One of Argentina’s biggest problems is its energy deficit. It spends around $10 billion on importing energy each year, which is then provided at subsidised prices to domestic users. But in the last year, the government has been taking concrete steps to correct this. A recent ruling allows producers to sell 20% of their oil and gas abroad at international rates, as long as they have invested $1 billion in the country, while local gas prices have also been raised. Crucially the government is planning to cut subsidies, which currently stand at 5% of GDP, in half to 2.5%. The government has also settled with Repsol — the Spanish oil firm that lost out when the government expropriated its share of the huge YPF oil company — and is looking to attract other international investors. For example, Chevron has signed a big shale gas deal out there. Meanwhile the newly nationalised YPF has started to boost output. These are all signs that Argentina will increase oil and gas production.

Given that the country has the world’s second-biggest shale gas deposits and fourth-biggest shale oil reserves, a change in policy could create an energy boom. This would also benefit the rest of the economy, as the government would have less need to control capital flight; it would have more money for infrastructure investment; and consumer spending would receive a boost. Indeed economic consultant firm, Capital Economics, believes that it could lift Argentina’s growth to around 5%.

Argentina’s other problem is international — that is to say its terrible relationship with the global financial community. Ever since its default in 2001, the country has been locked out of international debt markets. While the commodity boom was in full flow that didn’t seem to matter but now Argentina’s export earnings are falling, the government realises that being able to borrow has its advantages. But again, we can see signs of some improvement here. Economy Minister, Axel Kicillof, recently presented a repayment plan to the Paris Club — a group of rich country creditors — and is due to begin formal negotiations in May. The government has also improved its inflation statistics, a major bone of contention with the IMF.

People will tell you that Argentina has underperformed for ages. Perhaps, but the current energy crisis and international pariah status are actually anomalies in the country’s recent history. And when they are resolved, they will give a massive boost to the economy.

Don’t get me wrong, these firms could get hit in the short term as Argentina faces any number of risks. The country’s lack of access to dollars is slowly pushing it towards a balance of payments crisis and a bad soy harvest, Chinese slowdown or government-spending spree ahead of the 2015 elections could easily tip it into recession. It’s also possible that we could see a wave of strikes that would disrupt the economy. But in the medium term, if Argentina can solve its energy crisis and re-enter the global financial system, it looks likely to enjoy a solid recovery.

Some people might want to wait for the short-term risks to play out and hold out for the chance to buy into these stocks at a lower price. It’s a nice idea but timing these things is never easy. That’s why I think it makes sense to buy in now, sit back and wait for Argentina’s fortunes to improve.

James McKeigue,
Contributing Editor, Money Morning

Ed Note: The above article was originally published in MoneyWeek.

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