Investors Ignore Latest Argentina Crisis

Last Monday Argentina awoke to a murder mystery involving a locked room, a discharged gun and a dead man.

The security team outside had seen nothing, and at first the police said it must be suicide. But some details didn’t make sense. There was no suicide note for starters. And also, if he was going to kill himself, why had he made out a detailed shopping list for the week ahead?

All this might sound a like one of those quaint Agatha Christie murder mysteries. But when you know the full story, it starts getting more like a full-blown Hollywood thriller. The thing is the dead man wasn’t any old Argentine – he was a state prosecutor. On the morning he died, Alberto Nisman had been due to deliver a damning report to Congress, which accused the president of being part of a massive conspiracy with Iran.

The president, Cristina Kirchner, had originally gone along with the official police verdict of suicide. But in the face of massive public anger she was forced to backtrack. She conceded that it wasn’t suicide but instead pointed the finger at rogue elements in the Argentine secret service. The latest political scandal may seem like yet another warning to stay away Argentina. But judging by the performance of the equity and bond markets many investors are keeping faith with this unloved country.

Hollywood comes to Buenos Aires

Firstly, let’s try to get to the bottom of the mystery. Nisman believed that Iran had been behind the 1994 bombing of a Jewish centre in Buenos Aires. The city is home to the largest Jewish population in Latin America and the attack, which killed 85 people, was the biggest atrocity against Jewish citizens since the Holocaust.

Nisman didn’t just finger Iran. He also reckoned he could prove that the Argentine government, which has never officially found the perpetrators, decided to deal with the Iranians. In return for a cover-up the Argentines would get a beneficial grain for oil trade with Iran. He died before he could explain the report to Congress, but fortunately copies of his evidence had been passed on to allies.

It all seems damning for Kirchner but she has her own side of the story. According to her, rogue elements in the Argentine secret service had fed Nisman incorrect information and then killed him to implicate her. As a result she’s now taking the extraordinary step of disbanding the secret service.

The web of intrigue and conspiracies would make a good film. But sadly for Argentina it’s fact not fiction. All governments are capable of dirty deals but citizens hope that other institutions – such as the press, judiciary or police – will contain them. What really angers Argentines is that they have no faith that any of the country’s institutions are strong enough to get to the bottom of this.

Should investors be worried?

For most investors this latest drama will come as no surprise. The consensus view among Western investors is that Argentina is a basket case. Over the years, from the 2001 default to the YPF expropriation, investors have learned to mistrust Argentina and stay well away. Anti-Western soundbites from Kirchner, who is also taking a tough stance in the legal dispute with US ‘vulture funds’ (http://moneyweek.com/argentinas-next-default-2/), have helped to cement the idea that Argentina is no place for international investors.

Argentina has plenty of problems. It suffers poor institutions and an entrenched corruption. Transparency International ranks the country 106th out of 177 in its Corruptions Perceptions Index, while the World Bank scores it 126 out of 188 when it comes to the ease of doing business. But if you look past the problems there is real opportunity.

Argentina is incredibly rich in natural resources, with the world’s second-biggest shale gas reserves and fourth-biggest shale oil deposits. It is also an agricultural powerhouse. Think about it like this. Argentina is just a bit smaller than India. But whereas India has to provide for 1.2 billion people, Argentina has just 41 million. The population is also an asset. Its education system may be creaking but it’s still one of Latin America’s best and supports some decent local manufacturing, technology and service companies.

Sadly Argentina won’t win the battle against corruption, bad government and weak institutions anytime soon. But over the medium and long term it should create lots of wealth. Indeed Argentine stocks have rewarded those brave enough to ignore the bad headlines.

The local stock market, the Merval, gained around 60% last year. Of course a lot of that is because rampant inflation encourages locals to invest. But the performance of the US-listed Argentine stocks has also been impressive. There are 15 Argentine companies available on American stock exchanges, and they are up 54% over the 12 months. The bond market has also held firm throughout the ongoing scandal. It's clear that, for some investors at least, Argentina is still an attractive investment.