Troubled Argentina turns a corner


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.

For more insights on similar topics please visit our Emerging Markets and Credit pages.

This article is issued by Schroder Wealth Management (US) Limited, a firm authorised and regulated by the Financial Conduct Authority and registered as an investment adviser with the US Securities and Exchange Commission. Registered office at 1 London Wall Place, London EC2Y 5AU. Registered number 10761882 England. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Schroder Wealth Management (US) Limited unless otherwise stated. For your security, communications may be recorded and monitored.

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