The Investment Perils of Latin Populism

Argentina has taken a hard-left path in recent years that worries investors. As a result of poor economic policies implemented by President Cristina Fernández de Kirchner and her predecessor and husband, President Nestor Kirchner, the country faces several economic challenges.

Over the past decade, the country’s foreign exchange reserves have been dwindling, falling from a peak of about USD52 billion to around USD38 billion today.

Thanks to ineffective “populist” initiatives designed to garner votes, the Argentine government has been forced to dip into the country’s reserves to pay credits and fund infrastructure projects because the country has largely been frozen out of international lending markets.

At the same time, Argentina’s trade surplus has been narrowing as fewer and fewer trade partners are willing to do business with the country and the global economy enters a seasonally slack time of year.

As a result, unpopular foreign-currency restrictions have been in place for nearly two years, preventing Argentines from buying dollars as the government doles out only small amounts for tourism and subjecting businesses to significant delays in purchasing equipment and materials abroad. That’s forced many Argentines to purchase US dollars on the black market, which can carry a better than 60 percent premium.

The country’s inflation rate has also skyrocketed over the past decade, up from about 13 percent in 2003 to about 25 percent today, as the central bank uses the printing press to fund the country’s fiscal deficit.

Despite all of the country’s problems, Fernández wasn’t quite ready to hand over the reins of power.

The Argentine constitution limits the country’s chief executive to just two terms in office, barring Kirchner from running for reelection in 2015. But taking a page from the playbook u! sed in Venezuela, Ecuador and Bolivia, Fernández was hoping to secure a constitutional amendment changing that by the end of her term.

But Argentines are tiring of the country’s economic woes.

In elections held this past Sunday, Fernández’s Front for Victory (FFV) party failed to win the two-thirds majority she would need to amend the constitution. Just 32 percent of the votes cast in the Senate elections went to the FFV while the party and its allies won just 33 percent of the Chamber of Deputies votes.

Now that the Argentines have spoken, the country’s presidency is clearly in play. The question is whether the electorate will vote in former cabinet chief Sergio Massa, a self-proclaimed Peronist like Fernández but who recently broke with the government, or some other candidate.

Massa has yet to definitively announce his candidacy for the office, but he is clearly positioning himself for a run. However, with two years to go before Argentines pick their next president, there’s a danger that Massa’s star may fall ahead of the election. That’s particularly true as the Peronists, who have dominated the country’s government for nearly seven decades, become increasingly fractured. That raises the possibility of multiple Peronists running for the office, splitting the vote and allowing an opposition candidate to slip in.

The average Argentine is clearly fed up with the government’s maladministration, paving the way for other candidates to usher in a friendlier business environment. For investors, this possible development would be a signal to invest in the country.

Thanks to high inflation and the government’s seizure of Spanish energy company Repsol’s (Madrid: REP, OTC: REPYY) majority stake in YPF (NYSE: YPF), foreign investment in Argentina has dropped off a cliff. As once booming commodity prices have cooled off in recent years, few foreign companies are willing to bet on doing busines! s in Arge! ntina.

Goldcorp’s (NYSE: GG) troubles getting its Argentina property producing is an excellent case in point, with the company recently deferring work there thanks to soaring costs and permitting difficulties.

If the Argentine economy is to overcome its woes, foreign businesses will once again have to be welcomed with open arms. With nearly two years to go to the elections, it’s premature to make predictions. It’s apparent, though, that the winner will likely take a more reformist path.

Argentina is a stark example of what happens when a “statist” government drags down what has historically been a fairly prosperous people. It’s also an indication as to why, despite all the social and economic reforms that have been unfolding in China, the government in the Middle Kingdom has been resistant to open, free and fair elections.

If so-called populist governments want to remain in power despite failed policies, they should grow the economic pie and let their people have the first taste.