Argentina: An Investor’s Diamond in the Rough

Cullen Thompson (middle) is the founder of Bienville Capital Management, one of the few funds actively invested in Argentina. (Bienville Capital Management)
Cullen Thompson (middle) is the founder of Bienville Capital Management, one of the few funds actively invested in Argentina. (Bienville Capital Management)

EspañolFor the last eight years, foreign investors have run the opposite direction of Argentina, cast off as an economic basket case under the stewardship of President Cristina Fernández de Kirchner.

Her protectionist and populist policies, the takeover of private companies, and the ongoing battle with bondholders (known as the “vulture funds” in Argentina) have made investing in the country untenable.

But amid the Kirchner administration’s hostilities, some investors saw opportunity. Argentina, after all, possesses all the ingredients to be a global economic force. With the 2015 presidential election around the corner, and asset prices plummeting, a select few foreign investors felt the timing ripe to make an entrance.

The PanAm Post sat down with one of those investors to discuss the ramifications of the upcoming election, the state of the Argentinean economy, and the challenges the country faces. Cullen Thompson is founder of New York-based hedge fund Bienville Capital Management, one of the largest foreign investors in Argentina.

At a time when many investors avoided Argentina, you raised US$300 million and jumped into the market. What did you see in Argentina that others didn’t?

The investment world viewed Argentina (under Kirchner) as this pariah country, but after spending time on the ground speaking with private and public companies, we realized that there was nothing wrong with Argentina. It’s a beautiful country; it has a highly educated workforce, terrific people, and tremendous assets.

To give you a business analogy, Argentina is this really strong company that has this great product, but isn’t profitable because it has really poor management. Argentina needs a change in management.

So, in early 2013, we realized that Kirchner’s Front for Victory party (FPV) would lose the majority in the congressional midterms, and consequently wouldn’t be able to amend the constitution (for Kirchner) to run for a third term.

This was the first and, perhaps, most critical step. Then, we met with all three presidential candidates (Daniel Scioli, Mauricio Macri, and Sergio Massa) and determined all three equated to a sizable regime change in terms of economic policy, paving the way for us to invest.

You have met with both remaining candidates (Scioli and Macri) on multiple occasions. What are you looking for?

Much of the time was spent with their advisors, but we also spoke with business owners who had previous dealings with them. This helped us better understand their governing approach.

It’s one thing to listen to a candidate tell you what he’s going to do, but it’s another if you spend time with his inner circle to truly grasp what his policies and beliefs are.

The ruling-party candidate, Scioli, seemed to move closer to Kirchner to sure up his base during the first round. Do you feel he has the political backbone to reverse Kirchner’s policies?

One thing about Scioli is that he has an actual track record as governor [of Buenos Aires province], so we are able to review the actions he took on the fiscal side of things. But, I think what you see with his camp is that he’s having to talk out of both sides of his mouth to hold on to the Kirchner vote, while also attempting to attract more of the moderates.

But yes, if elected, he needs to immediately declare himself independent of Kirchner to ease the concerns of foreign investors.

Macri is the “business-friendly” candidate and openly admits that Argentina will have to go through a difficult adjustment period. What does Argentina need to do to get back on track?

First and foremost, Argentina needs to settle with the holdouts. Kirchner refused to settle with them and, as a result, Argentina no longer has a “credit card.” Neither do they have cash, because she has drawn down reserves.

Once the holdouts issue is resolved, they can gain access to the foreign-capital markets again. Additionally, there needs to be a fiscal adjustment on the economic subsidies, and they need to reestablish the credibility of the Central Bank. When the Central Bank isn’t obligated to print money to cover the fiscal deficits, it makes it easier to establish credibility. When that occurs, inflation will fall.

What are your timing expectations as it relates to the overall economic adjustments?

That’s going to take a while. You’re not going to take a fiscal deficit from 7 percent of GDP to zero overnight. It doesn’t need to go to zero. It just needs to come down.

What market participants would like to see from the new administration is a cohesive policy implemented over a three to four-year outlook. A committed plan will go a long way to restoring growth.

The other factor is a credible proposal to unify the foreign-exchange rate, whether it’s a devaluation of the official rate or a combination with an appreciation of the so-called blue rate. Argentina is suffering from an overvalued exchange rate, and it has taken a significant toll on agriculture exports.

What do you say to Argentineans who are skeptical of opening markets to foreign influences?

Resolving the foreign-currency exchange or removing the capital controls will, in itself, encourage Argentineans to bring money back into Argentina. There is reportedly $250 to $300 billion of offshore assets (held by Argentineans).

On the other hand, groups like us want to invest in the medium term and help the country grow. Argentina doesn’t have a pool of domestic savings to fund investments, and borrowing and lending at high rates of inflation makes it very difficult for the country to grow.

So my response is that incoming capital from foreigners and Argentineans will be a boost to the economy, but, of course, in certain sectors it will continue to be strictly monitored by the government.

Can Argentina regain its position from the early 20th century, when it competed with Europe and the United States?

If you think about it in the context of the last 100 years, Argentina was a prominent player in the early 1900s, because they had the assets Europe needed.

When the United States came on to the stage, it not only industrialized, but it also had agriculture. Today, Argentina should be very relevant, given their resources on the agriculture side. Look at China, for example, and its demand for protein. Even as China slows down, they are continuing to consume more and more. This will be a big bonus for Argentina, if it positions its policies to benefit.

Argentina shouldn’t just be a relevant leader in Latin America, it should be a global leader. It has the quality and quantity of assets to do so.

Disclosure: the author of this article is an investor in a variety of Bienville Investment Management funds.

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