Fixed Income

EMD Relative weekly notes: Week Ending August 16, 2019

08/19/2019

James Barrineau

James Barrineau

Head of Emerging Markets Debt Relative

In a 30-ish year career in emerging markets, this writer has seen a lot, beginning with the Mexican peso crisis. Previous stress episodes since then seem all united by some thread of fundamental mis-alignment, either emanating from a specific market or the global macro framework wobbling.

This week in Argentina was something completely different.
An unexpected primary election result left dollar bond prices down 40-something points, or about half their value on the Friday before the voting. The results left it more probable that a leftist candidate--but not a far leftist--would win the actual voting on October 27th. The market pretty accurately reflected a problematic, but improving fundamental story prior to the weekend, with Argentine bonds trading 400 basis points wide to the average similarly-rated credit--perhaps even a generous discount in an environment of global rate cutting and plummeting yields.

The political future remains uncertain--though more in the direction of a less favorable but far from disastrous outcome--just like it was before. The country is covered by an IMF agreement through 2020 that will not require market access. The current account deficit is improving rapidly and trade has been in surplus for 10 months straight, with the energy sector a particular bright spot, and is poised to go into a small but growing surplus. The currency has fallen, but only to fair value when adjusted for inflation.

The incentives for all sides--the current president, the probable future president, the IMF--is to avoid a debt crisis. Nothing in the numbers or the next two years of debt amortizations suggests one is necessary.
However, we recognize that the market can create its own reality: should the currency fall further (it has now appreciated about 6% in the past two days) that might cause deposit flight. Market pundits that were bullish last Friday are now conducting debt restructuring analyses. What you read about Argentina in the coming weeks is likely to be as fickle as the movement of asset prices, and 100% correlated with them.

But for now this is not a fundamental failure foretold by market indicators. Rather, if Argentina fails, we believe it would be the first country to do so by looking at a fleeting moment of market panic and talking itself into default.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.