Poor Fundamentals Still Argue for Under-Weight of Argentine and Venezuelan Shares Markets

Russia has not been the only state to alienate itself internationally.  Yet, Moscow’s efficacious approach to self-estrangement differs from that of two other pariahs of the developing world – Venezuela and Argentina.  Unlike the path taken by the Russian state, the populist, left-wing regimes governing Caracas and Buenos Aires have opted for self-imposed insularity – as opposed to deceitful diplomacy, cross-border subversion and territorial violations, betokening Moscow’s hostility to the West and its adjoining neighbors – to isolate them almost entirely from world political affairs and restricting or, in the case of Argentina, forestalling their access to global capital markets.

U.S. and Western European retaliation through financial sanctions against Russia’s insurrectionary misconduct and annexation of the Crimean peninsula, epitomizing the latter’s intensifying frustration with its much-reduced economic and political status globally, accounts for Russia’s worsening relations with its rivals in the West.  By contrast, the progressive isolation of Venezuela and Argentina is credited far more to the implementation of egregiously misguided public policies that have effectively compromised the macro-economy and undermined the private sector of each country, than to any ill-conceived foreign misadventures.  Global Markets Intelligence (GMI) reaffirms its recommendation that Venezuela’s and Argentina’s shares markets still do not deserve any investment exposure for the foreseeable future.

Domestic political and economic trends as well as policymaking climates render Caracas and Buenos Aires undesirable for debt and equity investment from either internal or overseas sources.  On the political front, the chaos in Venezuela gets worse by the day.  Battle lines have already been demarcated between pro- and anti-government factions across the country, and – although the leftist regime of President Nicolas Maduro pledged to hold midterm legislative elections in the next six months – fears persist in the opposition camp that the president might be on the verge of retracting his promise and petition the National Assembly to grant him extraordinary powers to re-establish order throughout the nation.

Mounting distrust among adversaries to Maduro’s administration is justified by the fact that the police arrested two leading opponents of the nationalist government on charges that the opposition deems “politically motivated.”  The months immediately ahead are expected to prove decisive to the stability of the Venezuelan polity, economy and society.  If lawmakers postpone midterm elections and authorize the president to employ enhanced policing powers to restore order, a widespread outbreak of sectarian violence would probably ensue, leading to a further disintegration of Venezuela’s socio-political fabric accompanied by desperate, though futile, efforts of the regime to retain power in an increasingly authoritarian direction.  In reprisal for the dictatorial turn in politics under Maduro, Washington recently designated Venezuela an “extraordinary threat to the national security” of the U.S. and levied sanctions against individual leaders of the South American nation.

In Argentina, the rule of law endures against an ever so fragile political landscape.  The country’s quadrennial presidential and biannual legislative ballots are scheduled to take place on October 25 and no single candidate has emerged as yet to succeed current lame duck President Christina Fernandez de Kirchner.  The center-right opposition is eager to have one of its own capture the executive office following thirteen years of volatile fiscal and economic management that led the government to cease servicing its debt twice since the economy collapsed into depression seventeen years ago.

Irrespective of whether a left- or right-of-center party comes to power later this year, the incoming regime will inherit the same problems facing the government presently in power.  Electing a candidate endorsed by the current president would further delay Argentina’s access to the global credit markets, whereas the victory of an opponent of the present regime may entail a negotiable, less nationalistic offer to recalcitrant creditors awaiting repayment of interest and principal on Argentine sovereign debt in which they invested in good faith in addition to reasonable expectation of remuneration by the borrower.

Capricious policymaking milieus in Caracas and Buenos Aires reflect the unpredictable political and distressed economic situations of both countries.  With oil prices having plunged below $50 a barrel, Venezuelan public policy has lapsed into crisis management once again for the purpose of ensuring adequate foreign exchange reserves are available to service its debt servicing needs and cover the cost of key imports (in particular, much-needed foodstuffs, the short supplies of which remain critical).

Since the discovery of extensive oil reserves, official corruption has plagued a succession of Venezuelan governments.  Still, ever since Hugo Chavez took the reins of the Venezuelan presidency, revenues derived from the nation’s most important export (petroleum) have been either plundered or underexploited to the disadvantage of the economy.  Monetary and fiscal policies remain hostages of the ill-conceived socialist schemes of President Maduro and his advisors, and we expect no improvement in the policy environment until Maduro and his predecessor’s Bolivarean Revolution cede control of the government to the opposition in the next legislative and presidential elections.

In Buenos Aires, policymaking reforms (both fiscal and credit) await the completion of President Fernandez’s term of office.  Since the Argentine constitution prohibits any two-term president from running for re-election to a third consecutive term, investors are hoping that the balloting this October will replace Fernandez with a free-market enthusiast and unseat populists presently occupying both houses of Congress.  Like Venezuela, public policies in Argentina are held captive of the staunch nationalist principles maintained by the president and her predecessor, Fernandez’s late husband – Nestor Kirchner.

Whether her successor is Mauricio Macri, Sergio Massa or Daniel Scioli, a change in leadership is bound to improve the next regime’s rapport with the capital markets.  For the time being, though, investors must endure the final months of the current president’s term of office and carefully examine the policy platforms of the three leading candidates to determine which one offers the best hope for a resumption of disciplined policymaking in the context of liberal, free market tenets.

Turning attention to the economic outlook of both countries, Venezuela has been and will probably remain one of the worst performing economies throughout the world.  Until a transfer of power takes place from Bolivarean socialism to laissez faire capitalism, investors can and should expect more of the same irresponsible financial management by the Maduro administration.  Even though the nation’s stock market is counter-intuitively out-performing all its competitors globally year-to-date in US dollar terms, no reason can be mustered to explain persuasively its league-leading status other than risk eager investors are directing funds there in anticipation of a regime change – which in no way seems immediately forthcoming.

Appallingly, Venezuelan debt issuance boasts a five-year credit default spread in excess of 5,700 basis points, mirroring the market’s grim prognosis for Caracas’ ability to service its sovereign liabilities, and a speculative-grade, triple-C credit rating by Standard & Poor’s Ratings Services.  Following last year’s estimated 3.6 percent decline in real GDP, Venezuela’s prospects are forecast to worsen.  According to Bloomberg median consensus projections, the steep descent in inflation-adjusted economic activity will gather additional momentum to the downside and deteriorate a further 0.4 point to -4 percent in 2015.

Argentina’s economic fate, meanwhile, appears only modestly better than that of its neighbor to the north.  Last year’s abysmal 1.5 percent decrease in aggregate economic growth will likely decelerate 0.2 percentage point to -1.3 percent this year.  Domestic inflation in excess of twenty-five percent should proceed to depress private consumption by eroding purchasing power and real personal disposable income.

Double-digit interest rates will remain in effect to combat hyperinflation, but – as a consequence – discourage capital investment in plant and equipment by businesses.  Labor market conditions are unlikely to demonstrate much improvement in 2015.  In fact, to the contrary, the jobless rate is projected to climb 1.75 points to nine percent in 2015, reducing any incentive for domestic businesses to increase production and employment.  With the budget and current account deficits expected to rise, Fernandez’s regime has little room for maneuver on the fiscal front.  Thus, the phenomenon of stagflation afflicting the Argentine economy should persist for the rest of the year before a new administration assumes office to tackle the parallel problems of rapid inflation and slow growth.

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