Cautious optimism based on managed devaluation rather than move to the dollar
On a three-to-six month time horizon, investors should be cautiously optimistic about opportunities in Argentina according to analysis conducted by the Emerging Markets team of global investment advisers, Payden & Rygel.
Payden & Rygel, which has more than 20 years’ experience of active participation in Argentina’s fixed income markets, is suggesting that initial economic policy signals coming out of Argentina are positive. President-elect Milei has indicated his willingness to pursue an orthodox economic adjustment in an effort to address the country’s runaway inflation (currently at 140% pa) and large fiscal deficits. In this context markets will look for:
- The selection of an internationally credible economic/financial team (we have already seen some initial appointments along these lines)
- A significant devaluation
- An orthodox fiscal adjustment (primarily in expenditure: equivalent to 4%-5% of GDP); and
- Renewed engagement with the IMF
“We judge the initial signs of the policy mix under Milei as being attractive to international investors. This has prompted a significant rally in the dollar-denominated Argentine bonds,” said Alexis Roach, Senior VP and EM Strategist at Payden & Rygel.
“That said, this scenario is also likely to result in a near-term recession reflecting a significant fiscal adjustment and large devaluation. As such, President Milei will only have a narrow window to use his political capital following his strong election victory. In other words, execution risk, which is a common stumbling block for many Latin American presidents, will be the next milestone to monitor.” Alexis Roach continued.
Payden is less enthusiastic about a dollarization scenario, which is something that Milei had emphasized on the campaign trail. This could constitute a risk to investors in that it would be very challenging to achieve. However, since his election victory Milei has been silent on dollarization and selected economic policy advisors that are not in favor of the practice. Payden sees this as positive.
“As fixed income investors, Payden’s involvement in Argentina stretches beyond dollar denominated sovereign bonds to investment in the debt of individual Argentine provinces and municipal entities. Some of these provincial authorities have dollar reserves coupled with conservative fiscal management. These bonds can offer double-digit yields and are currently relatively stable by comparison to their national counterparts where high risks/potentially high returns are the order of the day,” Alexis Roach concluded.
Payden has been involved, at different times, in debt securities from the Province of Cordoba, the Province of Santa Fe, and the City of Buenos Aires.
About Payden & Rygel
With $144.4 billion under management, Payden & Rygel is a global leader in asset management and includes, among its clients, Central Banks, Pension Funds, Insurance Companies, Private Banks, and Foundations. Independent and privately-owned, Payden & Rygel is headquartered in Los Angeles and has offices in Boston, London, and Milan. www.payden.com