By CNN


Rapid inflation, meager growth and a debt default have plagued Argentina for years.


But its new president, Mauricio Macri, has surprised many with the blinding pace of change he has undertaken in Argentina -- a country unaccustomed to economic reform.

Macri promised to reboot Argentina's economy, if elected. And since he took office on December 10, he's following through.

In the first seven days of his presidency, here's what Macri has done:

1. Lifted currency controls

The biggest change came Thursday when the administration lifted currency controls and let the peso float freely.

"This is how a normal economy functions in any part of the world," the country's new finance minister, Alfonso Prat-Gay, told reporters Wednesday.

The previous president , Cristina Fernandez de Kirchner, had placed controls on the peso for four years to curb inflation. Despite that, inflation has climbed higher and just this year rose about 25%.

A mostly fixed exchanged rate caused the peso to become deeply overvalued. Until Thursday, the peso was worth about 9.8 pesos to the dollar.

Once the controls were lifted Thursday, the peso tanked 26% to 14.5 pesos to the dollar.

The move has risks. It can case the peso to lose too much value and spark even more inflation.

However, the currency manipulation discouraged foreigners from investing in Argentina. And the country badly needs foreign cash. Last month, American Airlines announced it wouldn't accept pesos, partially due to how overvalued the peso was.

2. New central bank president

Macri's party appointed Federico Sturzenegger, a U.S. trained economist, to lead the central bank.

Sturzenegger needs to encourage foreign investors to come back. Quickly.

Argentina's central bank has seen its foreign reserves plummet in recent years due to debt payments and inflation. Reserves peaked over $50 billion in 2011, but have since fallen to $24 billion, according to the central bank.

3. Tax cuts

Macri cut personal income taxes and lifted taxes on exports to help stimulate trade and spending.

Kirchner had implemented the export tax and outraged farmers in Argentina. The country's economy is powered by commodities like oil and soy. Exports are crucial to its economic growth.

Farmers, mostly grain suppliers, have now agreed sell the grain reserves that they've piled while waiting for the currency to devalue.

4. Cash cushion from abroad

Macri and a group of international banks have already agreed on a $5 billion loan which will shore up reserves while the government rebuilds investor confidence.

Prat-Gay, the finance minister, said he expects cash flows into Argentina will be anywhere between $15 billion to $25 billion over the next month, which will help boost the central bank's reserves.

5. New numbers guy

Hardly anyone believed Kirchner's numbers on Argentina's economy. The IMF demanded earlier this year that Kirchner's regime publish more legitimate data.

So Macri brought in a new team of econ nerds to bring credibility back to Argentina's statistics agency, INDEC.

Legitimate data should also lure investors back to Argentina.

6. Two new Supreme Court justices

Macri is expected to bring a lot more reforms. If challenged, he has to make sure the reforms stand a chance in court. Macri issued a decree to appoint two new supreme court justices to vacant seats. Those appointments should help his agenda.

7. Ending fight with Wall Street vultures

Argentina needs cash and the biggest road block is a group of hedge funds in New York who own defaulted Argentine debt. Kirchner refused to pay them and Argentina has been shut out from accessing foreign financing until it pays the bill.

Macri's team says it will negotiate with the creditors, led by billionaire Paul Singer. But any agreement has to be passed through Congress, where his party is the minority.

Major challenges lie ahead for Macri and Argentina, but experts agree he's taking the right steps so far.

"It's still early days, but Mr. Macri has made a good start to his term in office," says Neil Shearing, chief emerging market economist at Capital Economics, a research firm.

Source: http://money.cnn.com/2015/12/18/news/economy/argentina-how-to-fix-an-economy/

By The Wall Street Journal

Argentina’s new government on Wednesday lifted currency controls, allowing its citizens to buy dollars freely for the first time in four years and setting the stage for a sharp depreciation of the peso.

The move, which officials hope will kick-start the faltering economy, is the strongest President Mauricio Macri has yet made in his bid to roll back the government interference that marked the country’s economy under the previous presidencies of Néstor and Cristina Kirchner.

“Ending the currency controls is the starting point for getting the economy back on its feet,” Finance Minister Alfonso Prat-Gay told a news conference.

The decision carries significant short-term risks but equally big long-term rewards if it triggers greater investment and lifts the country’s sagging export sector, economists said.

In the short term, the move is likely to spark the biggest currency depreciation since Argentina’s messy economic meltdown in 2002. Economists expect the peso to fall from its current official price of 9.8 to the dollar to the black-market rate of between 14 and 15 per dollar, losing a third of its value.

Underscoring the risks, the step came on the same day the U.S. Federal Reserve raised its benchmark short-term interest rate for the first time in eight years, making it relatively harder for other countries, including Argentina, to attract investment.

A weaker peso will make imports more expensive and add to the country’s already high inflation rate of 25%. To keep the lid on price hikes and attract investment, Argentina’s central bank on Tuesday raised its benchmark rate as high as 38%.

Argentina has precious little money with which to defend its currency in an open market: In the past four years, the central bank’s listed foreign currency reserves have plummeted from more than $52 billion to around $24 billion. Economists say the bank’s real net reserves are far lower considering liabilities like money owed to importers and outstanding bond payments.

“In the end, nobody knows how fast the depreciation is going to be, if it will occur in a matter of days, or it may take a little longer. And, of course, that is going to depend on the intervention of the central bank,” Goldman Sachs economist Mauro Roca said from New York.

To address those fears, Mr. Prat-Gay said Argentina is on track to obtain between $15 billion and $25 billion in fresh cash from a combination of agreements with international banks, grain exporters and China’s central bank. He said grain exporters have agreed to turn over $400 million a day in coming weeks from farm sales.

That amount of available dollars is greater than expected and should provide a short-term cushion for the central bank, said Siobhan Morden, the head of Latin America fixed-income strategy for Nomura Securities.

“It is not in itself a solution, but it certainly buys them time to resolve the main problem which is the high fiscal deficit,” she said.

Argentina’s fiscal shortfall is about 7% of annual economic output, a gap that has largely been bridged in the past few years by the central bank printing money, and thus fueling inflation. Mr. Macri has promised to narrow the gap, and has already announced cuts to fuel subsidies.

The cheaper peso will hit multinational companies differently. Some may have to take an accounting write-down, but the vast majority are likely to welcome the policy U-turn.

“We are extremely encouraged by what’s happening in the country,” said Alexander Nickolatos, chief financial officer of Eco-Stim Energy Solutions, Inc., a Houston-based oilfield services company. Mr. Nickolatos said the company’s contracts are dollar-denominated and that it kept a low amount of pesos on hand in anticipation of a depreciation.

Freeing currency controls was the latest in a dizzying series of moves Mr. Macri has made since he took office on Thursday.

His administration has eliminated most farm export taxes, cut personal income taxes, begun re-staffing Argentina’s discredited statistics agency, replaced the central bank president, and appointed two Supreme Court justices.

While many Argentines want to overhaul the sickly economy, they also fear the changes. Retailers and their suppliers have been marking up prices in anticipation of a decrease in the peso’s value.

“We raised our prices by 40% before the exchange-rate changes so we wouldn’t lose money,” said Marcela Ledesma, 48, who runs a retail store selling imported orthopedic equipment such as wheelchairs and walkers.

Prices rose 1.2% in the first week of December alone, the fastest clip since Argentina devalued the peso by 20% in January 2014, according to Elypsis, an economic research firm.

Mr. Roca at Goldman Sachs said inflation will likely rise and economic activity will remain subdued in the short-term. “When you take the medicine, you are going to have some side effects at the beginning,” he said. “But the trade-off is that you will get better economic prospects in the medium and long term.”

Amid rampant inflation and a lack of faith in the peso, Argentines have for years sought refuge in dollars. The demand for greenbacks, combined with rising demand from the government—which itself needed dollars to make debt payments and pay for energy imports—acted like a pressure cooker on Argentina’s financial system, eventually leading to a scarcity of hard cash.

To stanch the bleeding, former President Cristina Kirchner largely banned the sale of dollars in 2011.

To police the strict measures, Argentina’s tax agency trained dogs to patrol the borders and sniff out dollar bills carried by travelers in and out of the country. The agency often arrested people crossing the border with rolls of dollar bills taped to their legs or hidden in automobile compartments.

But the currency controls merely fueled more demand for dollars, leading to the creation of a vast underground currency market where people paid a 50% premium to buy greenbacks. Illegal money changers popped up across the country and individual traders—known as “little trees” for the dollars they figuratively sprouted—became commonplace in certain sectors of Buenos Aires.

Mrs. Kirchner let the peso depreciate very slowly, in the belief that a strong exchange rate boosted people’s purchasing power. But that approach devastated Argentina’s real-estate market, where transactions are done in cash using dollars. It also hurt exporters whose goods became less competitive abroad.

The measures also failed to contain inflation, which was among the world’s highest throughout Mrs. Kirchner’s eight years in office.

Companies, meanwhile, struggled to obtain dollars to buy parts and equipment, stifling growth and sometimes causing critical shortages at places like hospitals, which depend on imported supplies and equipment. In January, Argentina faced a national tampon shortage, prompting women here to take to Twitter to ask friends traveling abroad to bring back supplies.

Now, Argentina is entering uncharted territory.

Exporters would benefit from depreciation, obtaining up to 50% more pesos for the same product from one day to the next. The housing market could also rebound if people can again buy dollars needed for transactions.

But many ordinary Argentines are anxious.

“Last week, my wholesaler raised prices by 50% on headphones,” said Moises Grinberg, 45, who runs a cellphone and audio accessories shop in Almagro, a middle-class neighborhood in Buenos Aires. “If I raise prices that much on my clients before the holidays they won’t buy anything. So I have to absorb the cost. I’m afraid the devaluation will bankrupt my business.”

Source: http://www.wsj.com/articles/argentina-to-announce-lifting-of-currency-controls-1450286389

By Bloomberg

Argentina voted for deep change on Sunday, electing the center-right opposition leader Mauricio Macri to be president in an end to 12 years of leftist populism, setting the stage for economic liberalization, a warming of relations with the U.S. and political reverberations across Latin America.

Macri won 51.4 percent of the vote against 48.6 percent for the ruling party’s Daniel Scioli, the National Electoral Council said, with more than 99 percent of ballots counted. At Macri’s headquarters late Sunday, his supporters danced and cheered for "Macri Presidente,” as he told them “a wonderful new stage begins for Argentina.”

The next morning, Macri reiterated that he would eliminate exchange controls, called on the central bank to aid the transition and said he would name his cabinet as soon as possible. The slump in international reserves represented a problem for Argentina and the new government would have to... (Read More)

By Bloomberg Business

Argentina could gain an investment grade in 2016 if the next president tackles policy changes from lifting capital controls to publishing reliable economic statistics, said Jorge Brito, president of Banco Macro SA.

The most important sign for investors will be the next president’s inauguration speech on Dec. 10, which should clearly lay out a credible economic plan to regain confidence and attract capital, Brito said in an interview at the headquarters of the bank in downtown Buenos Aires. Opposition candidate Mauricio Macri is currently favored to prevail over the ruling party’s Daniel Scioli in a runoff vote on Nov. 22.

“It’s irrelevant if they lift currency controls on day one or in 180 days,” Brito said. “The important part is... (Read More)

By Forbes

It’s official. Mauricio Macri made harder work of it than polls had expected, but he achieved just over 51% of the votes in last night’s run-off compared to just under 49% for Kirchner candidate Daniel Scioli. He is the new elected president of Argentina. So now what?

“Regardless of the tight margin, the elections send a strong message that a majority of Argentinians favour a change,” says Alejandro Hardziej, fixed income research analyst at Julius Baer. “Macri recognises the need to boost the competitiveness of the corporate sector and exports, and has promised business-friendly reforms to spur investments.”

Macri is seen as a pro-business leader, and some of his intended priorities include lifting capital controls and liberalising the exchange rate (to a point, anyway), which Hardziej says in practice means depreciating it by between 20 and... (Read More)

By Buenos Aires Herald

Farmers will benefit from increased incentives next year because both candidates in the November 22 runoff have vowed to eliminate wheat and corn export duties, while promising steep decreases on soybean export duties.

Top advisers for Victory Front (FpV) candidate Daniel Scioli and Let’s Change (Cambiemos) contender Mauricio Macri said both would immediately scrap the 20-to-23 percent export tax now levied on wheat and corn exports. That measure has been a long-held demand by environmentalists who say the country’s farms are in desperate need of crop rotation after years of soil erosion caused by over-planting soy.

The two candidates disagree, however, on how much the soybean levy should be decreased from the current 35 percent. Scioli has vowed to... (Read More)

By The Wall Street Journal

In a dark year for many hedge funds, Argentina is emerging as an unexpected bright spot.

For more than a year, a handful of firms piled into Argentine investments, hoping elections to replace President Cristina Fernández de Kirchner would usher in an economic turnaround. Few investors expected a huge, immediate payoff: Just last year, the South American nation defaulted on its debt amid a legal clash with hedge funds, including Paul Singer’s $27 billion Elliott Management Corp.

But on the heels of the strong showing in the Oct. 25 first-round presidential election by Buenos Aires’s business-friendly mayor, Mauricio Macri, firms such as Bienville Capital Management LLC, Brevan Howard Asset Management, Redwood Capital Management LLC and Perry Capital LLC are counting their winnings.

The funds have been betting on shares, bonds and the Argentine peso, in addition to more esoteric investments. Russell Abrams, a former hedge-fund manager in New York, for example, has purchased what he says is the largest fleet of taxis in Buenos Aires as a way to invest in the country.

“The first round of the elections, including the opposition's victory in the province of Buenos Aires, was a clear repudiation” of President Kirchner’s policies that will make it easier for any winning candidate to embrace market-oriented reforms, says Cullen Thompson, Bienville’s founder. “Better policy should lead to a better economy.”

Bienville placed early wagers on Argentina and had its Argentine-focused fund, now up to $300 million, soar about 33% last month, according to an investor. Brevan Howard’s Argentina fund, now about $530 million, jumped about 22% in October, according to people familiar with the firm run by Alan Howard. The Bienville fund now is up about 30% for the year, while the Brevan Howard fund gained 14% through October, the people say.

 Jonathan Kolatch’s Redwood Capital was up about 10% in October in its Argentina fund and also posted gains in its flagship fund, where its Argentina trade makes up one of its largest positions, said a person familiar with the matter. Redwood holds some Argentine stocks but has more exposure to bonds and growth-linked securities known as GDP warrants.

The $12 billion Fir Tree Partners made about 20% on its Argentina position in October, thanks to GDP warrants and bonds, according to people familiar with the matter, contributing to gains for its flagship fund for the month.

Perry Capital LLC, whose Argentina position is one of the largest in its $9 billion flagship fund, also profited. Perry made about $60 million on the position, made up of exchange bonds and GDP warrants, in October, said a person familiar with the matter. Third Point LLC also benefited; Argentine government debt is the largest position in the firm’s credit portfolio, founder Daniel Loeb said in a conference call last week for his publicly traded reinsurance vehicle.

The gains come as emerging-market investments have rebounded sharply over the past month. Argentina’s Merval Index is up about 33% in peso terms since the end of September, while Argentine sovereign debt has climbed 8% in pesos, according to the Barclays Emerging Markets Argentina International Issue Index.

This year, several high-profile investments held by many hedge funds, such as Valeant Pharmaceuticals International Inc. and SunEdison Co., have run into problems, making the Argentine profits more valuable. Brevan Howard recently cut at least 10% of its workforce, illustrating funds’ difficulties. In a research note to clients dated Oct. 23, J.P. Morgan described this year as the worst for hedge funds since 2011.

The rallies began before the first round of Argentina’s election took place last month. Recent polls put Mr. Macri significantly ahead of rival Daniel Scioli, who has the endorsement of President Kirchner, in the Nov. 22 runoff election.

Hedge funds may face challenges extending their profits. A year or so ago, Argentine shares were very inexpensive, based on traditional valuation metrics, but they’re no longer as cheap. Just as important, it isn’t clear how much will change when a new president assumes power in December.

Argentina’s fiscal deficit will total 7.2% of GDP this year, according to a recent government estimate—the highest since 1982, when a military dictatorship was in power. The International Monetary Fund expects GDP to contract 0.7% next year, and economists say annual inflation is growing around 25%.

“The inheritance of bad policies, undermined basic institutions, widespread corrupt practices, mountains of past-due bills, frayed international relations, and a deeply divided electorate represent a veritable minefield for whoever takes over,” says Arturo C. Porzecanski, a professor of international economics at American University’s School of International Service. “Change will come no matter who wins, but it will occur in stages.”

Bienville is among those holding on to their Argentine holdings, saying a new president seems likely to engage in negotiations with the hedge funds that held bonds but didn’t consent to a restructuring after Argentina’s 2001 default.

The bulls say a settlement likely would give Argentina access to global capital markets again for the first time in more than a decade, leading to hopes for more gains as corporate profits rise and the nation gains a higher credit rating.

Mr. Thompson and other bulls say Argentina has been starved of capital under Mrs. Kirchner’s administration. Argentine assets accordingly represent a small slice of the portfolios of most global investors, something that will gradually change. One trader said he views Argentina as “one of the only growth stories in the world.”

Mrs. Kirchner has described the holdout hedge funds’ attempts to collect as akin to “extortion” and called some of the holdouts “vultures.” In contrast, Mr. Macri told the Financial Times soon after the election that while he wanted to be tough with hedge-fund creditors, he wanted to end the conflict.

“With Kirchner leaving office, there’s increased optimism about the country’s willingness to resolve outstanding liabilities,” says Gregg Hymowitz, managing partner of hedge-fund investor EnTrust Capital, which has money in several funds with exposure to Argentina.

Source: http://www.wsj.com/articles/from-default-to-darling-argentina-bets-pay-off-for-hedge-funds-1447204491

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