Argentina emerges
Comment Comeback could be oversold, writes Alejandro Rebossio
Argentina’s voters have chosen Mauricio Macri, the outgoing mayor of Buenos Aires and a former businessman, as their new president.
After 12 years of mercurial interventionism under first Nestor Kirchner and then his wife Cristina Fernandez, Macri’s market-minded pragmatism suggests a dramatic shift. In fact, judging by the markets’ bullish reaction, Argentina may be on its way to becoming the next fashionable Latin American nation.
With the Latin American economy as a whole shrinking for the first time since 2009, the continent could use some economic good news. Yet the fate of past market darlings should give pause to their would-be champions.
Recently, for instance, Goldman Sachs closed its Bric fund — an investment vehicle that it created after coining the acronym in 2001 to sell stocks and bonds from the booming economies of Brazil, Russia, India and China — after years of mounting losses.
The fate of Bric poster-child Brazil is particularly instructive.
It earned a cover on the Economist for stellar growth during the worldwide crisis of 2009 — four years later, with the economy stagnating, the Economist recanted. Next year, Brazil’s economy is expected to shrink by as much as 2 per cent.
Why do Latin American market darlings emerge and then stagnate or collapse?
To answer that question, you must return to 1989, when the International Monetary Fund, the World Bank and the US Treasury Department adopted the Washington Consensus as a strategy for developing nations and the Brady Plan was launched, leading Latin America to seek a solution to its debt crisis by swapping bank loans for bonds saleable to clients.
JPMorgan then created the Emerging Markets Bond Index funds with the stocks and bonds of those countries, sales force management systems to place them with clients, and groups of economists who would tout the potential of economic reforms and the bright future such investments were likely to have.
It worked — everyone from high-powered funds to Italian retirees snapped up debt from countries such as Argentina.
Thus, in the 1990s, Mexico and Argentina became fashionable, though the former suffered its so-called Tequila Effect in 1994, and the latter entered into a recession in 1998 and crashed three years later.
Even though Chile’s smaller economy slowed during the 1990s, it earned praise as the only country that saved during boom times.
As the Argentine economy plunged after its 2001 default, the myth of Brazil took hold.
In 2003, leftist trade unionist Luiz Inacio Lula Da Silva took office with a combination of orthodox macroeconomics and increases in the minimum wage and social spending that lifted 40 million of his compatriots from poverty.
Jose Antonio Ocampo, a professor of economics at Columbia University, suggests this was the first time a Latin American nation that was not altogether faithful to the Washington Consensus had captured market affections.
A decade later, accompanied by its own Economist cover, came the inevitable downfall.
Marketing demands require that banks make new products out of emerging markets.
They find those that are growing the most and that follow the norms of a relatively standard economy.
Thus, as Brazil began to show signs of fatigue, the banks created in 2011 Civets, including Colombia, and the Mavins and the Eagles, which both included Mexico.
When a country falls out of fashion, the markets must elevate and sell another in its place.
These emerging market funds feed back into the liquidity so characteristic of today’s world, even though it is the early investors who reap the rewards and the later investors who suffer the consequences when the bubbles burst.
Although banks and the media have promoted the Mexico of Enrique Pena Nieto as the successor to Lula’s Brazil on the catwalk, economic imbalances, rising poverty and horrific violence have drowned out that fanfare.
Colombia, in turn, never became fashionable.
Argentina, dependent on soy, “may become the country in fashion in two years if the next president gradually makes the changes he will need to make”, says Harvard’s Eduardo Levy Yeyati
Macri’s victory may cause Argentina to shine again in the markets, but that may not necessarily bring benefits to Argentines. It is one thing for a country to earn money for its speculative investors for a season and quite another for it to develop in a sustainable and equitable way.
Despite the boost in gross domestic product and reduction in poverty and inequality that Latin America enjoyed in the first decade of this century, such balanced development remains its most demanding challenge, even if it’s less eye-catching for the markets.
Marketing demands
require that banks make
new products out of emerging
markets.