WASHINGTON, Jan. 16 (UPI) -- Argentina appears to have improved its economic act after several years of devaluation woes, debt default, and associated political fallout. "Improved," of course, is a relative term.
The government has put together the basics of a deal (to be announced shortly) with the International Monetary Fund. It is only a bridge loan to roll over Argentina's debts to the IMF and World Bank from now through its presidential election, tentatively set for April 27.
More fundamentally, for eight months now, the central bank has stabilized the peso at about 3-to-1 to the U.S. dollar, a sustainable level. The action has helped bring Argentines back into the banking system and the economy, while, at the same time, keeping inflation somewhat in check.
As a result, Argentina's exchange rate has fallen by 60 percent, while domestic prices have risen by only 30 percent. The result is what economists call a "real devaluation" -- a kind of "30 percent off" sale on Argentine products overseas. The trade surplus has doubled, enabling Argentina to rebuild foreign currency reserves, and sending unemployment down to 18 percent (from highs above 20 percent).
Many investors and institutions have nibbled on Argentine assets in recent months, anticipating these wholesome trends and enjoying a run up in the stock market of better than 50 percent from lows of last September. For those who did, it may be time to pull back and take profits.
There's an old saying on Wall Street, "buy the rumor, sell the news." For months, a number of G-7 countries have put pressure on the IMF to do something to help Argentina through its election cycle, even if fundamental changes sought by the IMF were lacking. The critical date was November, when the United States replaced former Treasury Secretary Paul O'Neill, an event that "The Bottom Line" estimated would have an especially positive impact on Latin markets.
The logic of sell-the-news has been well illustrated in recent weeks. Rumors of an IMF deal buoyed stocks another 20 percent in late December and into January. On Tuesday, Jan. 14, the government confidently announced it was about to pay off an Inter-American Development Bank, or IADB, loan of some $700 million. It was a psychologically important promise, made with much fanfare as President Duhalde posed for a photo with Brazilian President Ignacio Lula da Silva.
Then Wednesday, the due date for the payment, came and went -- with Argentina still in default. Argentina is in the process of paying the loan, hopefully by Friday. It has the money, and according to reliable sources in the Argentine government and opposition, only delayed because Duhalde wanted to secure the IMF terms (not necessarily the funds themselves, but the loan approval and terms) before paying off the IADB.
Still, when you're doing things to build financial confidence, it's a misstep to make a promise and not deliver -- even by a few days. Accordingly the Argentine market has pulled back from its highs and paused.
In any case, all these facts will soon be facts. The question for markets, as always, is, "What's to come in the future?"
For Argentina, which has been through several presidents in the last two years, that is supremely a question about politics. Here too, much good news has been discounted. President Eduardo Duhalde, who moved up from Argentina's Congress after the executive branch essentially collapsed, has proven capable of at least running the show, and led the currency stabilization outlined above. He's announced an election for April 27, and begun some of the steps to make it happen. He also announced, initially, that he wouldn't seek the spot himself, but then reversed and by all accounts is now in the running.
In itself, Duhalde's decision to run is also, by historical tendencies, bullish. Countries tend to do well when chief executives are re-elected. The opportunity and desire to stay in office leads them to do things that will help the country prosper, and the mere fact of a re-election (if it's a fair one) can convey stability.
The way Duhalde has gone about the matter, however, is far from straightforward -- partly reflecting the special circumstances of Argentina's collapse, but partly reflecting raw ambition. He's fiddled with the date for an election more than once, and is now, again, running close to the time when he must fish or cut bait: We're only three months away from late April, and Argentina's parties (most notably, Duhalde's) haven't selected candidates.
The reason is a probable challenge from the former, highly successful president of Argentina, Carlos Menem. Menem has huge negatives, including the involvement of associates in alleged influence peddling, some questionable financial transfers in his own right, and a penchant for shooting from the verbal hip. Menem, though, will be a formidable foe, having guided the country through more than a decade of apparent prosperity. Duhalde recognizes this, and has tried to do everything he can to adjust the party rules, and election timing, to frustrate an effective challenge.
Fiddling with election mechanics, or even well-meaning confusion, is something that nearly always spooks the markets. This was seen during a bearish move in U.S. stocks after the disputed Florida result of 2000, and in the Israeli elections of the last few months.
As this process sorts itself out, and especially if it does so in a way to allow a real competition between Duhalde and Menem, the results will be positive for Argentina. There will be an economic debate about exchange rates, banking issues, and the rule of law -- followed by a vote and a decision. The result should be a new leg to Argentina's bull market.
For now, it's probably a good time to take profits in Argentine assets, pull back, and let the political machinations play through. The time to buy will be when an election timetable is set, and the mechanics -- especially for selection of a candidate by the Peronist Party of Menem and Duhalde -- are in operation. Out for now.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group, dcfund.net. His firm may hold some of the securities mentioned his articles. Individual investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)
