Argentina’s Stretched Intervention Band
Argentina’s peso as the worst emerging market performer, down 12% through April, continued to drag stocks and bonds with it as runaway political fears about the return of former President Christina Fernandez joined 50% inflation to force the central bank to abandon the IMF-agreed no-intervention zone. The peso veered toward the low 50s/dollar, as tighter fiscal and monetary policies could not dampen consumer price increase expectations or instill business confidence, amid relentless capital flight and banking system shift to short-term deposits for immediate access. Current President Macri, has fallen behind Christina in opinion polls before the October elections, even though she has not declared and faces corruption charges from her tenure. Her memoir was published at the same time as the popularity surveys and contained anti-IMF diatribe investors cite as the basis for repeated debt default after last year’s $55 billion rescue. In June, the major party contenders will be chosen in primaries to clarify the race, with former Economy Minister Lavagna in the mix from the center-right as a preferred financial community alternative. To tame inflation, the benchmark interest rate was hoisted above 60% and controls were imposed on staple items and quickly provoked shortages. The government has leeway to raise budget social spending, but poverty hits one-third the population and only minimal economic growth is projected this year. The much-promised foreign investment boom never materialized as offshore energy was whipsawed by US fracking competition, and multinational companies faced huge valuation losses in currency translation under standard accounting rules. With cumulative inflation above 100% the past three years, the dollar must now be used in balance sheet statements as the “functional” unit.
Brazil in contrast is positive across financial assets despite recent pullback, as the Bolsonaro Administration’s twisted economic and social strands create conflict and confusion. The President glorifies the pre-democracy military junta but has been at loggerhead with his vice president, a noted former general, over foreign and security policies. As a mainstay in the campaign platform, he denounced immigration, but Venezuelan refugees from socialist Venezuela are now a notable exception. In schools his early emphasis is on purging curricula with untraditional family values, while the business community urges skills and technology training. The manufacturing PMI is above 50, and FDI is on track to recover to $70 billion annually, but industrial output remains slack on 12% unemployment. Corporate profits are up from previous recession to bolster stocks, and bellwether state firms like oil giant Petrobras and development bank BNDES are under dynamic new management. They are under the influence of the University of Chicago free-market approach championed by Economy Minister Guides, who founded a private equity house and a think tank reflecting the philosophy. He is leading the charge for overdue reform of public pensions swallowing the budget, and has battled with lawmakers for a majority to fix the “doomed” system. The effort has been bogged down in internal government fighting over content and strategy, and complications from the relentless Car Wash investigations with parliamentarians and their allies in their sights. With estimated GDP growth under 2%, the 6.5% benchmark rate should not budge, and with $300 billion in reserves and a stronger real intervention is unlikely unless central bankers are accused of unconventional social behavior.