Market Views: Fixed Income
Troubled Argentina turns a corner
Market sentiment towards Argentina is likely to improve after a landmark week which should bring greater clarity on the country’s outlook.
Argentina has had a very consequential week, replacing its central bank head and announcing a new IMF deal. We believe both are positive for the country.
Even before this week, Argentine dollar debt was up about 8% for the month, after under-performing its index by a wide margin.
Central bank credibility has been a significant factor in investors losing confidence in Argentina. Random interventions in the currency markets to attempt to control currency volatility were ineffectual, leading only to a loss of reserves. Inflation targets were clearly unobtainable. The new head previously worked for the finance minister and the coordination between the two should by itself improve the overall policy regime.
The revised IMF deal expands the size of the package to $57 billion and front-loads it, allowing the country to stay out of the debt issuance markets through 2019. That alone should improve sentiment among dollar investors.
The deal also requires an end to interest rate targeting and a strict monetary policy growth target of 0%. This should slow inflation quickly over coming months but also produce a more pronounced growth slowdown.
The currency is to trade within a band with no intervention, except during extreme volatility when it nears the edges of the band. That clarification should comfort investors that the IMF money will not be frittered away underwriting capital flight for Argentines.
Challenges remain, however. Most importantly the president must maintain a minimum level of political support. An election looms in late 2019, and investors will have to hope that growth has bottomed before the voting to allow the market friendly president to win a second term.
Nevertheless, the additional clarity afforded by the events of this week should improve market sentiment as Argentina remains significantly cheaper than the rest of the dollar-denominated emerging market debt universe.