In a month that’s seen Argentina win an historic victory in US courts and Venezuela lift gas prices for the first time in almost two decades, Gavin Serkin interviews Exotix Partners’ head of research, Stuart Culverhouse, on his outlook for the continent.
ARGENTINA
Gavin:
Argentina was back in the courts again last week, but this time the government received a favorable verdict, convincing a New York judge to drop orders barring the nation from issuing new bonds and paying its existing debt.
The decision substantially weakens the bargaining power of those hedge funds like Paul Singer’s Elliot Management still holding out for a settlement on debt that Argentina defaulted on back in 2001.
For everyone else, it means that Argentina could finally be about to normalize relations with international investors, and its bonds have been rallying on the back of that.
Clearly, these are very complex investment areas that we’re talking about, and it’s not going to suit every investor, but if you are in that market, what should you be doing in Argentina right now?
Stuart:
Argentina is on the path of normalisation after 15 years in the wilderness, essentially following the default in 2001.
It’s taken this long to resolve some of that defaulted debt, mainly through the courts, and President Macri, who took office in December, has taken huge strides to try and resolve this, and also implement other economic policies to rebalance the economy.
The inheritance from Cristina Fernández de Kirchner was pretty weak, so with that in mind they’ve tried to reach a solution with the holdouts and the plaintiffs.
It’s happened probably a bit more quickly than expected. We thought that we might get a deal in the first half of this year, but we seem to be ahead of that.
There is an argument that the deal isn’t as good as we might have expected it to be for some of the plaintiffs, who might have wanted to hold out for longer, and certainly the judge has consistently been against Argentina, really, in the way that it’s handled this.
But the light at the end of the tunnel on Friday – Judge Griesa essentially saying that he would lift the injunction subject to a couple of conditions, which are probably doable over the next few weeks – really changes the balance of the negotiation now and I think a lot of people will be expecting a deal to happen pretty soon.
Argentina will re-rate as more of a normal emerging-market compared to what it’s been before.
VENEZUELA
Gavin:
Venezuela has been revising its economic policy in the hope of easing the economic turmoil there – raising petrol prices, for example, for the first time in nearly two decades, and devaluing the bolivar. But it doesn’t seem to have made a huge impact so far on investor sentiment.
Stuart:
Yes, some might it’s a bit too little, too late. President Maduro has been talking about this, actually, for over a year now.
Obviously, with oil prices falling, it’s unmasked a lot of the inherent vulnerabilities that we saw under the Chavista model and therefore he probably had to do something, but that’s been put off. I think what changed in the political decision was the National Assembly elections in November/December, which really changed the balance of power, and the opposition now have a majority there and can probably influence things.
The fact that he’s announced some measures is useful. But the depth of the problems is so deep that it may not be enough. There is a real concern in the market that Venezuela is going to be a default candidate. We don’t think it will default this year, but prices of bonds are in the 30 to 40 level and that shows you something about the risks now in the market.
It’s still going to be a very big challenge and they really need to secure financing from other people – in particular China – to get themselves through the next couple of years with oil prices at these levels.
ECUADOR
Gavin:
Another country that’s been truly out of favour just lately has been Ecuador. It’s another oil producer whose bond yields have been rocketing into the high teens. But you’re also optimistic there. What’s the picture for you?
Stuart:
Ecuador really paid the price for this strategic default in 2008, when oil prices fell sharply. The knee-jerk reaction was to default on your bonds, or certain bonds, anyway.
Memories are short in the City, but they’re long enough to remember that, and I think they pay a premium now because of that market perception.
Yields have risen. I think they’re now about 14-15%, which is quite high, but I actually think that offers value because, yes, the president defaulted several years ago, but he’s trying to honor the debts now that they’ve incurred.
They’ve adjusted their policy. They don’t have a flexible exchange rate. It’s dollarised, so that puts more emphasis on fiscal policy, and they are adjusting fiscal policy.
We’ve got a president who is sort of leftist-leaning but who has actually implemented a wage freeze, and I think that’s, again, a positive response to the shock.
