If (as Roubini says) cash is king in 2008, how about a few Argentine Pesos in your account?

Below are two charts, taken from the useful economics website www.latin-focus.com, that show the long-term trade balance evolution of Argentina and Brazil. Just to be annoying we have not labeled them with the country names but a more enigmatic “fig. one” and “fig. two”. The reason for this poor example of analytical clarity is to highlight the similarities of the state of play in the two countries (though the numbers on the scales should be a big enough clue; trade balance on left scale, imports and exports on right scale). All the same the evolution is pretty similar.

Fig. 1

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Courtesy www.latin-focus.com

Fig.2

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Courtesy www.latin-focus.com

Both Argentina and Brazil have enjoyed good growth in the last 5 years. Both have exports as key policies to support the good times. But one major difference is the monetary policies the two countries have adopted. Brazil has not been afraid to let its currency float relatively freely, and as a result the Real has appreciated significantly against all world currencies in the last 5 years. Argentina has taken a different approach. Using aggressive Central Bank intervention policies, it has maintained its currency at an artificially low level. The mantra in Argentina all this time has been, “The low exchange rate is good for us. It helps exports.” Well tell that to Brazil; they continue selling goods to the world without too much hassle from a rising currency. The result is fig. 3 below, which shows the forex rates of the Real versus the Argentine Peso.

Since the Cristina presidency began, there have been no moves away from the weak peso policy. Currency reserves keep ballooning under the present policy of bank intervention, now standing at U$47.3Bn and up another U$15.2Bn since January 2007. There comes a moment when a country has enough “rainy day” reserves and Argentina has long-since passed that point. Maybe they are considering starting a sovereign wealth fund to buy up cheap real estate in the US? Or maybe they are keeping the Peso low to attract an influx of Brazilian tourists to keep growth going?

Joking aside and without beating round the bush much further, we submit that today’s Argentine peso is a knock-down bargain. We believe inflation (Argentina make-believes it was 8.5% in 2007, but it was likely around 20%) will become an even more serious issue in Argentina 2008 than it is already. Eventually the country will have to face reality and allow its currency to appreciate to stop growing consumer imports from fuelling the inflationary fire. This might upset the export sectors (mainly auto industry chiefs and soybean farmers who would have to settle for a less luxurious 4×4 this year if their dollars only bought P$2.80 and not P$3.14) but the critical point will be upon us soon enough, and the case of Brazil clearly shows that a stronger currency does not necessarily inhibit export growth. The alternative is that eventually George Soros or one of his acolytes will do the currency revaluation for them, and if that happened we confidently submit that the transition would not be as smooth as it might have been. One way or another, the free market has this nasty habit of eventually dictating true values. Fig. 3: Brazil Real/Argentine Peso Exchange Rate

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Courtesy www.yahoo.com

6 Responses to "If (as Roubini says) cash is king in 2008, how about a few Argentine Pesos in your account?"

  1. Guest   February 4, 2008 at 2:45 pm

    Hi Mark,I cannot agree more with you. Great piece.Nicolas Magud

  2. mark turner   February 4, 2008 at 10:14 pm

    Thank you Nicolas. It was your post dated 29th January that got me thinking about the subject, so ‘straight back at ya’.

  3. Mangy   February 10, 2008 at 9:47 am

    Good analysis, which backs my long AR$ position.However, a peso appreciation (whether nominal or real through inflation eroding a “fixed” 3.20 rate) may well go beyond the horse power and upholstery of the 4X4s. As would also happen if international agflation recedes: at some point it would lead to a review of export duty scales, and therefore fiscal revenues.BTW: With K and L together again in the alphabet soup. Is the para-official inflation rate for 2007 23.9%, as reported by Ecolatina (in a timing that coincided with the reconciliation, bear hug?)

  4. mark turner   February 10, 2008 at 3:37 pm

    Nice to see you again, mangy.The receding agro price scenario is a fair point, though that would play out in 2009 minimo. I see this reval happening on a shorter timescale. Though what price weakness might do is provide the tipping point and open the doors for Mars Attacks. I was debating this note with my bestest porteño pal who works in the planning dep’t of a large agroind import company. His attitude of “it won’t happen: the auto/soya lobby is too stong and will stop any revaluation” was pretty typical of the insular mindset of Argentina. They don’t seem to get that if they don’t do it themselves, it’ll be taken out of their hands soon enough. I remember the UK pound and the ERM, and we’re not talking about a ‘pais serio’ currency here. It only needs a couple of voracious hedgies to wake up one morning and see the quick turnaround profit staring them in the eyes. This is not rocket science.How much of those precious reserves would the BCRA throw at the money market before admitting defeat? My guess is a couple of billion, but not much more. A first staging post of “2.80/1 will be no great harm to the export numbers anyway, and the 4x4ers will at leats be able to drown their sorrows in cheaper single malt.As for the K+L show; i can’t say i’m really surprised, can you? It sure makes klishtina into a fine figurehead :-) As for the L group, their 23.9% is just a touch too rich for my blood. I called arg inflation at 15% minimum, up to 20% mid point last eyar and i’m sticking with the upper end of that level. Word has it that INDEC does its tourism price surveys at La Salada these days ;-)

  5. Mangy   February 13, 2008 at 6:57 am

    MarkK/L comment tongue in cheek. But the Ecolatina number raised my eyebrows.Have settled amicably on 18% for one retainer.Another is in the soup due to lack of objective benchmark, and a new manager who wants to show he can swing his weight, to the extent of overruling an email by his deputy. Coming from a former key-trader who has obviously forgotten what “my word is my bond” means (meant?), if not “pacta sunt servanda”, as latin is probably not taught to cema boys. Worthy of returning him to exile in the loony bin.Also on the price line, I do the weekly household supermarket jaunt, if only to get a (non systematical) “heat sensation” of prices, and branding (part of which is disguising price hikes with old wine in new skin), etc. Skipping January on vacation, my first February cart was a rather pleasant non-surprise, except for wheat passing through to crackers, cookies and bakery.The utilities flattened CPI in 2007, but might spike 2008. At least on old basket.La Salada y.o.y. may be OK as a partial benchmark. In fact, at times a day at the trade union pools may rise faster than a fortnight at the Happy City. Problem is when La Salada 2008 is vs Floripa 2007 as the real surges.

  6. RL   February 13, 2008 at 11:25 am

    I doubt it will happen. Authorities will mantain their startegy of cheap peso if they want to mantain their story of miracle recovery. I think the story with inflation is other way around. The economy will naturally reach its real echange terms right, but through inflation , and that its what is happening. Therefore I fear that in the medium and long term (if the international demand seroulsly deteriorates more so) the peso will tend to be weaker in nominal terms not stronger.RL