Argentina’s Unforgiving Account Fixes
Argentine stocks were up 15 percent on the MSCI frontier index through July, but lagged the core roster on continued recession and 30 percent inflation, as the government looked to an undeclared asset tax amnesty to raise confidence and revenue. The fiscal deficit is almost 5 percent of GDP, but the action is expected to bring in over $50 billion out of a total $200 billion hidden fund estimate. Higher energy prices to close the gap were struck down in a court ruling, and official rhetoric dismissing protests as quibbling over the equivalent of “extra pizza costs” dented the Macri team’s popularity, at below 50 percent in opinion surveys ahead of mid-term elections next year. The central bank has lowered the benchmark rate to 30 percent, and the first half trade balance was positive despite lower Brazilian demand, but employment, manufacturing and investment continue to drop and less than 40 percent of the population predicts near-term economic recovery. The administration has blamed its predecessor for these predicaments and backlash against former President Fernandez and her cabinet ministers has been fueled by criminal investigations into alleged embezzlement and money laundering. Judicial prosecutors have blocked her bank accounts and credit cards, and previous public works head is in jail after being caught with almost $10 million in bills stored in trash bins. The President’s family and real estate business partner are also under suspicion while she describes the charges as political and argues that her tenure “deserved the Nobel Economics Prize” for crisis stabilization and creditor challenge. Distressed funds have chalked up stellar gains since the current government’s decision to settle outstanding claims, with Gramercy returning 20 percent in its $750 million dedicated vehicle, as it prepares to raise another $500 million, according to reports.
Brazil and Peru have been the runaway Latin America leaders with almost 60 percent increases, as Gramercy goes after the new PPK presidency in Lima to redeem decades old agrarian bonds under a different formula than in 2013 following a court ruling. It calculates the total owed at $1.5 billion after servicing stopped during farm nationalization in the 1980s, and that the investment-grade sovereign credit rating should be marred by a selective default. In another strategy an arbitration request has been filed under the US-Peru free trade agreement seeking compensation, even though only direct inflow disputes were originally covered. Brazil’s rally extended during the Olympics, as Dilma Rousseff’s impeachment trial went ahead and former President Lula was also implicated in bribery allegations, mainly through the defunct Oderbrecht construction firm which was contracted for Games venues. A $1.5 billion sovereign bond opening was well-received, with the EMBI index likewise up over 20 percent, as stagflation and bad bank loans seemed to bottom in the latest figures. The current account deficit is unchanged at 4 percent of GDP but offsetting FDI is firm and the event tourism windfall will offer additional support. Interim President Temer was defeated in his initial bid for a constitutional ceiling on discretionary spending growth, which is just a sliver of the budget, as he also tries to revisit public pension and state commercial and development bank reforms barely heard among the crowd din for high-level official pursuit.
