Wednesday, February 3, 2010

[UBS Investment Research] Emerging Economic Focus: Latin Drama (Transcript)

If a thing is worth doing, it’s worth doing badly. – G.K. Chesterton

What to do with these two?
For last week’s global EM conference call, we decided to return to take a look at two of the most interesting and confusing economies on the emerging scene today: Argentina and Venezuela. It wasn’t too long ago that UBS Latin America regional economist Javier Kulesz gave us an overview of these two country cases (see The Risky Ones, EM Focus, 22 September 2009), but a few months is actually a long time in these fast-moving places – and the news flow over the past few weeks has been simply amazing even by emerging standards: a large and sudden devaluation, bank nationalization, removal of a central bank head, official FX reserves taken from central bank balance sheets, social destabilization and political intrigues, as well as the tantalizing prospects for a successful debt renegotiation and new large investment deals. In order to make sense of the situation, we brought Javier back to give us his latest views on the developing situation.

Where do we come out? Well, at risk of oversimplifying a very complicated and fluid situation, in the very near term Javier’s answer falls towards “short Argentina, long Venezuela” – and his longer-term structural call is very much the opposite: long Argentina and short Venezuela.
Let us explain what we mean. In our view Argentina comes out looking relatively worse in the near term, as the ongoing institutional conflict is likely to dominate headlines and perhaps even push back the timing of a pending debt exchange, and in this sense Javier sees the market as overly optimistic in its current pricing. On the other hand, as before he agrees that the longer-term outlook is likely to be more favorable once we get more visibility on a new post-2011 administration and policies. By contrast, Venezuela should enjoy a fiscal respite this year as a result of the recent devaluation, and the continued strong global interest in the Orinoco Belt bidding process (with a steady stream of good news since the original call took place last week) suggests that the market is too bearish on Venezuelan debt at the moment. Nonetheless, looking forward into 2011 and beyond Javier sees less hope for structural improvement
in the economy; instead, he stresses the downside risks of repeated devaluation and potential social and banking crises. The following is the full transcript of the call:


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