How to Destroy an Economy
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When God was creating the different countries, he stopped for a minute to think about fairness. And then he said: “This country has all the advantages, abundant natural resources, talented people, no religious or racial conflicts and no natural disasters either. That's too much, let's put some Argentinean politicians there”
That old Argentinean joke is more representative about the country's economic reality now more than ever. Over the last ten years, most Latin American countries have capitalized the bull market in commodity prices to achieve unprecedented growth rates and record levels of foreign investment. Venezuela has been one notable exception, and the Argentinean government is sadly going down the same road instead of following the footsteps of more rational leaders like its neighbors in Brazil, Chile or Uruguay.
Due to rapidly increasing fiscal spending, big monetary emissions, interest rates below inflation levels and a complete lack of trust from local and foreign investors, Argentina has experienced inflation rates of around 25 percent over recent years. During the same period the government has kept the exchange rate artificially strong to boost consumption.
Under such conditions, the country's goods have become much more expensive in the global markets, and local exporters have difficulty competing. Imports have been going up three times as fast as GDP per year and, making matters worse, Argentina has become a net importer of oil and gas due to an inconsistent and erratic energy policy coupled with a strong rise in internal consumption of fuel at low prices fixed by the government.
The expropriation of the biggest local oil company, YPF (NYSE: YPF), from Spain’s Repsol is an attempt to revert the decline of energy production in Argentinean soil, but investors have considerable reasons to feel concerned about the value of their investments. Investors in YPF are facing enormous uncertainties about the company's future.
The Argentinean government has appointed Miguel Galluccio as the company's new CEO. Galluccio is a respected engineer coming from professional circles, and he has made some comments regarding possible alliances with international energy players in order to increase capital spending and production, which may seem like a rational and market-friendly idea.
But everybody knows that Gallucio is under strict political surveillance, and there are some very important questions that need to be answered before even considering an investment in YPF. Will international investors trust the Argentinean government after the expropriation? Does the government consider investors' profitability as a desirable achievement? Will the country's energy policy – like price regulations -- be modified so YPF can become a more viable business? Will YPF even remain as a listed company?
Judging by what the Argentinean government has done lately, there are no real reasons to feel optimistic about investing in YPF or any other company with high exposure to Argentina. Shares of local banks were falling deeply last week, as news about very interventionist regulations created an extra source of concerns for investors in this sector.
The new rules mandate the biggest Argentinean banks to lend an amount equivalent to 5% of deposits to different companies for investment in productive capital expenditures like machinery or new buildings. These loans will carry a maximum interest rate of 15% annually, which is much lower than current inflation rates in the zone of 25%.
The government is telling banks how they should lend their money, and has also decided they should charge negative real interest rates for those loans. Needless to say, that's not a very market-friendly approach, and it shows a complete lack of regard for investors in these banks and their rights to have their capital managed in an efficient way.
There are some unbelievably low valuations in Argentinean banks. Banco Frances (NYSE: BFR) carries a P/E ratio of 2.5, while Banco Macro (NYSE: BMA) has a P/E ratio of 2.6 and Grupo Financiero Galicia (NASDAQ: GGAL) trades at 2.1 times earnings. These are solid companies with strong financial positions, but as long as politicians keep forcing them to make really unintelligent decisions from a business perspective, investors should stay away from them.
As could be expected, years of irrational economic policies have finally become a stronger force than rising commodity prices, and Argentina seems to be heading to a severe slowdown, or even a full blown recession. If the government responds with more absurd ideas, things could become even worse for the country and its people.
There are some extremely cheap companies in Argentina, and sooner or later the country may have a more reasonable political leadership that should produce an outstanding buying opportunity in these stocks. At this time, however, watching from the sidelines is a much better idea.
acardenal has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.