Argentina’s new dawn

On Sunday, Mauricio Macri became the president-elect of Argentina. He began the race as an outsider but a surprise shift in momentum has taken him to the Casa Rosada. It’s another twist in the fascinating political history of Argentina since independence.

Fair elections have chosen the rulers of Latin America’s fourth-biggest economy – once the world’s fifth – for the last 30 years, but voters haven’t done a great job of picking good presidents. A heady mix of corruption and populism means that a great country has, for the most part, been badly managed.

Sunday’s ballot brought a leader who promises to fight some of the ills that have traditionally stopped Argentina achieving its potential. I was bullish on Argentina even before the pro-business Macri won the election. His victory is great news for our Argentinian stocks, and should bring more investment opportunities.

Macri is wading into a political quagmire

Let’s get this straight – Macri has just landed himself one of the most difficult jobs in the region. Argentinian politics has traditionally been dominated by patronage. First, it was the caudillos, who used their wealth to corral political support. Then the arrival of the enigmatic Juan Perón in the 1940s ushered in new style of state patronage. After the fall of the military junta in the wake of the Falklands defeat, there was real hope for a new type of politics, but it gradually reverted to the model of populism and patronage.

Of course no political system is perfect – just look at our own Mickey Mouse lords system – yet the corruption in Argentinian politics is particularly endemic. I have friends in Argentina who have been told that to land a certain political role they have to agree to give a percentage of their earnings to the person who gives it to them. The idea is that they make it back by doing the same to some other young graduate in the future.

I remember when I first arrived in Argentina as a young freelance journalist, being enchanted by the sight of mass protests in the street. It seemed so passionate, and exactly what I had expected Latin America to be like. Yet the longer I lived there, the more I realised that many of these protestors were bussed in to serve the needs of vested interests. They were pawns, being used to create the disorder that prevents rational debate about the hard decisions the country needs to take.

It’s this political morass that stops Argentina – a massive country endowed with natural wealth and an educated population – achieving its huge potential. It’s going to be hard for Macri to challenge the status quo, yet if he could make a start, it would be something.

An economic mess

The political backdrop has created economic mismanagement. Macri is preceded by the husband-and-wife team of Nestor and Cristina Kirchner. First Nestor and then Cristina revelled in this system, buying off voters with populist measures, such as giving TVs to the poor. To begin with, their economic record was good, as Argentina’s economy powered back from the great depression it suffered at the turn of the century. High commodity prices gave another boost to the agricultural exporter.

But behind the strong growth figures, problems were brewing. The unorthodox style of economic management meant huge distortions were building up in the economy. For example, Cristina Kirchner wanted to stymie ‘profiteering’ energy firms by fixing a maximum price that they could sell their natural gas to the local market. It might have seemed like a good idea, but it meant that oil companies stopped investing in exploration and production, which led to the energy-rich country being forced into costly gas imports. Another big distortion is the exchange rate, which is held at an artificially high value that just drives demand for black-market dollars. Finally, you have inflation running at around 35% per year – a clear sign that something is going wrong.

As a result, Argentinian economic growth has slowed. No one believes the official figures, but Capital Economics estimates that the Argentinian economy has contracted since 2011.

A mammoth task awaits Macri – but investors should benefit

Given how much Macri has on his plate, the markets, which have shot up since his shock performance in the first round of the election, seem perhaps a bit too optimistic. But I guess investors are thinking that whatever he does will be an improvement on his predecessors. He has promised to ease capital controls, improve the quality of the economic statistics, and give the central bank a more defined role. It’s a good start, but more serious problems – such as the lack of competitiveness of Argentinian exports, the country’s exile from international debt markets, and a growing fiscal deficit – will all need to be tackled for growth to return.

In the short term, Macri is going to have it tough. He doesn’t control a majority in either house, which will hamper his ability to take the strong measures needed. Yet I have been bullish on Argentina since 2013 – not because I had a crystal ball and expected a pro-business leader to come to power and solve all of the country’s problems, but because Argentina’s unpopularity with investors meant that great companies in a wealthy country were being ignored. All of our Argentinian tips have done well since then, and Macri’s arrival can only help them do better.