Argentina's new centre-right government is returning to global bond markets. Investors are keen to buy its high-interest bonds - but the country has been a serial defaulter in the past. What makes this time different?
Why is Argentina perpetually subject to crises? The country of 43.4 million people has a literacy rate of over 98 percent, enormous natural resources, a vibrant export-oriented agricultural sector and a diversified industrial base. Yet it has defaulted on sovereign debt eight times, experienced a massive economic depression from 1998 to 2002 and weathered repeated monetary crises.
The country has gone through boom periods as well. It rebounded from its most recent crisis in 2002 - which resulted in an $82 billion (72 billion euros) sovereign debt default - with six years of growth at an average of 8.5 percent.
But the country has run into trouble yet again. Inflation is high and account deficits are deep.
Late last year, the population finally rejected the rule of populist Peronist President Cristina Fernandes de Kirchner, who had succeeded her husband, the late Nestor Kirchner, in 2007. Instead, voters elected the centre-right Mauricio Macri to the Argentine presidency. The new leader has lost no time in initiating large-scale economic policy changes since taking office in December.
Big changes, quickly
Argentina shifted from being administered by populists with a tendency to nationalize industries to being governed by bankers looking to make Argentina play by the rules of global markets. President Macri named Alfonso Prat-Gay, who once ran the currency research unit at JP Morgan Chase in London, as finance minister. He appointed Federico Sturzenegger, a US-trained economist and former president of Banco Ciudad, a state-run municipal bank, as head of Argentina's central bank.
Mr. Macri has "prioritized technical capacity over political aptitude," according to Eduardo Levy Yeyati of Elypsis, an economic research firm, in a recent Wall Street Journal interview. He's far from the only analyst who believes that this is probably what the country needs.
"Macroeconomic policy tightening will subdue growth in 2016," believes The Economist Intelligence Unit, an economic think-tank associated with The Economist magazine. "But combined with improvements to the business environment, it should set the stage for higher rates of growth in the medium term of over 3 percent per year."
Argentina has finally ended the years-long dispute with bond investors holding onto pre-2002 Argentinean sovereign debt, which allows for a return to global sovereign bond markets and thus access to dollars with which to make purchases on global markets. Macri also lifted currency controls - leaving the Argentine peso to float in foreign exchange markets - reduced administrative restrictions to international trade and investment, and pledged to prioritize infrastructure investments to boost productivity.
The Economist Intelligence Unit expects inflation to drop from the current 30 percent to below 10 percent over the course of the next couple of years, as Argentina returns to issuing dollar-denominated bonds on global markets.
The country is expected to issue about $12 to 15 billion of such bonds in coming weeks and use them to pay out pre-default creditors. It may then issue around $18 billion in new bonds over the course of the year to help finance President Macri's ambitious infrastructure spending plans.
Interest is high among investors, since the bonds are expected to yield around 7 or 8 percent annual interest - a fabulous rate compared to what hedge fund managers or other international investors can get elsewhere. German "bunds," for example, have recently yielded negative interest rates.
The difference reflects fears that investing in Argentina remains a high-risk proposition. Will the country fall off the wagon again, and return to dysfunctional economic policy? Can President Macri's pro-market economic liberalism really cure what ails Argentina?
Emerging markets like Argentina are perpetually vulnerable to financial destabilization through sudden, massive inflows and outflows of hot money - international capital that chases returns on financial papers globally. For Argentina's return to indebtedness in dollars to be a positive move - the dollar is, after all, a foreign currency Argentina cannot create on its own, and must earn through foreign exchange surpluses in order to pay interest on dollar-denominated debt - the country will have to push down the interest rate it pays on dollar-denominated debt over time.
Another key factor is whether President Macri's push to increase productivity will succeed. The government sees improvements in infrastructure and production facilities as one of the pillars of future prosperity. To that end, it has sought to attract foreign direct investment - and made it plain to US President Barack Obama on his recent state visit to Buenos Aires that US investors would be very welcome in Macri's Argentina. But the government will also need to invest serious amounts of its own money in improving the country's infrastructure.
President Macri has announced "Plan Belgrano," aimed at improving industrial development in ten northern provinces. Some social housing and child care centers are also planned, and there have been promises of improved education, better urban services, and institutional reforms to fight corruption.
Four months into his mandate, it's too early to say whether Macri's vision will succeed in finally putting Argentina on a stable path to prosperity. One barrier to his prospects is that the parties that backed him for the Presidency don't have a majority in either the Senate or Congress. But there's little doubt his reformist zeal is for real.