The 2017 elections have left Argentina’s ruling coalition, Cambiemos, in a strong position and ending its second year in office on a high note. As a result, we expect the economy to grow 3% this year, and by making a full recovery from 2016’s recession, consumption and confidence have turned the corner and markets are rallying. The government is still hopeful for its 2017 scorecard, despite slower than expected progress in the macroeconomic rebalancing. Two years into the new administration, Argentina continues to have inflation above 20%, a fiscal deficit that is not consistent with stabilising public debt and an overvaluation of the currency.
Looking ahead, additional improvements in the valuation of Argentina’s assets will depend on whether the government delivers on its reforms agenda. The electorate has given the government a clear mandate and the political capital to speed up the reforms. In particular, we at Puente believe that, besides meeting its fiscal consolidation targets, there are four key reforms that the government will concentrate on passing through Congress during the rest of the current term: the capital markets reform to make local markets more efficient and deeper; a new fiscal responsibility law to curb the worse excesses in federal and provincial spending; a labour amnesty to broaden the tax base, and; the tax system reform to increase the tax intake while lowering individual rates. The good news is that the political dynamics after the election could make most of these reforms feasible, resulting in a very promising outlook for Argentina in the next couple of years.
In our view, current valuations of Argentinean assets have not only priced-in the government’s electoral win, but are also pricing-in that most of the reforms will materialise over the next couple of years; therefore we believe that a significant upside remains. A successful macroeconomic rebalancing and progress in the reforms agenda would put Argentina on track to becoming a BB country by 2020. Joining the group of BB countries would be the first step towards the full normalisation of Argentina. A step which will continue to boost demand for Argentinean assets and lower funding costs by as much as one percentage point; a momentous change, which would certainly result in the start of a prosperous cycle for a country with large capex demands in key sectors like energy and infrastructure.
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