One of the side effects of higher interest rates is the dwindling investor tolerance for leftist policies or bad governance in Latin America. With U.S. treasuries paying 5%, why would anyone bet on Latin American leadership that makes an enemy of capitalism?
The contrasting sentiments shown for Argentina versus Colombia provides stunning evidence of the change in investor thinking. In less than two years, Gustavo Petro has turned Colombia, Latin America’s investment darling, into an uncertain place to do business. Three of Colombia’s most promising private sectors—oil & gas, healthcare, and coal production, which are collectively responsible for more than half of the country’s exports and foreign investment—are all under attack from policies and regulations steeped in ideology and naivete. Oil and gas exploration was halted, ostensibly to save the environment. We now know this was simply a ploy to justify importing PDVSA gas via a (to be refurbished) coastal pipeline. The move benefits the Maduro administration, an important ally, and will bring jobs to the Colombian coast where Petro needs more electoral support.
At first, investors were not sure how to embrace a Milei presidency in Argentina. Was he a serious libertarian or an eccentric quack? Now that the circus antics of campaigning are over, investors seem to be betting that Milei is the real deal. Their change of heart came when he cast aside the focus on dollarization—and its pundits on his team—and recruited political veterans from establishment parties to fill key cabinet positions. That pragmatic pivot sent the dólar azul, Argentina’s freely floated black market currency, soaring by 17% in less than a week and Argentine ADRs climbed 20-60% in value. Hedge funds are poised to invest in Argentina’s tiny capital market, realize massive gains, and extract their profits in dollars once currency controls are lifted. Vaca Muerta, Argentina’s massive oil & gas field, is once again a target of interest for foreign investors. The country’s federated mining rules historically insulated the sector from Buenos Aires’ political madness, but miners struggled with capital controls. A freer financial policy framework will unleash billions into Argentina’s lithium and copper deposits. Once the peso is freely floated, then investments will come in retail, e-commerce, insurance, construction, and other domestic sectors.
In a world of scarce capital and pretty average commodity prices, no one is prepared to invest in Latin American political lunacy. After the fiscal debacle of fighting COVID, no government in the region has the means to waste or plunder to the degree they did in the past. Thank goodness for the Fed.