With Cristina Kirchner set to end her eight-year run as Argentinian president when the country goes to polls on October 25, investors have raised concerns over whether there will be true change.
For Citywire A-rated Charles Biderman, who runs the Comgest Growth Emerging Flex fund, there is little hope that her successor, whoever that may be, will produce a meaningful shift away from existing policies.
Speaking to Citywire Global, Biderman said: ‘The first round of the elections is coming this weekend. At first glance, the bad news is that political continuity is the most likely outcome with Daniel Scioli, a Kirschnerista, the polls’ favourite.'
Emerging market debt specialist Yerlan Syzdykov, who runs the Pioneer Emerging Markets Bond fund, thinks a victory for Daniel Scioli, who is aligned with Kirchner, may come to pass after a second round of voting.
After talking to representatives of two competing camps, Syzdykov said the political agendas of both Scioli and his main competitor Mauricio Macri appear quite similar. ‘They also have similar issues to address such as budget deficit and imbalances in the current account,’ said Syzdykov.
The only major difference between two candidates Syzdykov sees in their approach: as Scioli is prepared for more gradual moves and the retention of successful Kirchner policies, while Macri is for more aggressive reform.
Both Biderman and Syzdykov said current economic policies in Argentina are not sustainable with inflation running too high, currently sitting at highly elevated levels, as well as with the existence of multiple exchange rates.
Biderman said there are two exchange rates in the country at the moment, an official rate at 9.5 Argentinian pesos per dollar and another one so called “el Dólar Blue” at 15 Argentinian pesos per dollar.
‘The country now has no choice but to go in a more orthodox direction, which may be enough to break the vicious inflationary circle,’ said Biderman. ‘This will boost the economy, giving businesses a much more normal environment in which to operate.’
He added, however, that the inflation problem can be solved fairly easily. Biderman said, if elected, Scioli is likely to reduce subsidies to energy and transport, which currently amount to 6% of GDP and is equal to the current account deficit.
‘However, to then enter into a more virtuous circle of sustainable growth will require further structural reforms,’ said Biderman. ‘These may be too painful from a political standpoint, and as such less likely to happen.’
Syzdykov said that the new President will need to raise artificially low tariffs in order to repair the fiscal side of the economy. He said the gas price in Argentina in comparison to the neighbouring Brazil is six times lower.
‘Domestic gas and electricity prices stayed low for a long time,’ said Syzdykov. ‘If you raise them by 50% it will bring relief for the government's coffers.’
Sovereign debt as future opportunity
Syzdykov said investors are closely following the resolution of the holdout investors deal, which has been rumbling on since the country defaulted in 2001 and led to Argentina being effectively locked out of international markets.
He said he expects a deal with borrowers, led by Elliott Management, to be concluded in April of next year and said this is an important step for Scioli if he wants to improve Argentina's economy and attract investments.
Syzdykov's fund still holds a one percentage point overweight to Argentina, which is mostly in corporate debt. He currently maintains low exposure to Argentinian sovereign bonds.
‘We might add more on sovereign debt after the holdouts deal is resolved, as it is likely that new debt will be issued,’ said Syzdykov.