Economic reform appears to be reaching a limit in Argentina, where courts are forcing the government to cap natural gas price increases at 400% year-over-year for individuals.
Meanwhile, there has been a rabid appetite for the country’s debt, and the Global X MSCI Argentina Exchange Traded Fund (ARGT) up more than 26% this year, including a 23% rise in oil and gas producer YPF (YPF). In this context, here are the reflections of three experts:
S&P Global Ratings‘ Chief Economist for Latin America, Joaquin Cotani sets the scene and explains the deficit-GDP dilemma:
“Argentinian President At Mauricio Macri’s government has achieved impressive results since taking office on December 10… [including] the unification of the exchange rate, the elimination of most export taxes, an agreement with recalcitrant creditors and a mega-investment of public debt according to the agreement. The next major challenge for the administration, in our view, is the reduction of a colossal primary deficit in the fiscal accounts left by the previous government. However, the attitude adopted on budgetary issues is lax, which creates doubts about the future of the economy, in particular with regard to disinflation and the sustainability of growth…
In the four years before President Macri took office, Argentina’s economy grew at a paltry 1.6% per year, which means that, on a per capita basis, it did not grow at all. .. Consumer inflation, on the other hand, averaged nearly 30% a year… At the end of May, the government announced a plan to increase public pensions and devolve tax revenues to the provinces which, s If implemented (which is almost certain), will cost the national government a significant amount of money and ensure that major deficit targets are met…nearly impossible to achieve. This new development has come as a big shock to many analysts, ourselves included, given the seriousness of the fiscal situation to begin with… The most troubling potential consequence is that social security spending will rise from an already high from 10% of GDP to 13%, higher than in Brazil and comparable to… France, Germany and Japan. … For 2018, we forecast a primary deficit of 4.5% of GDP against an official target of 1.8%.
Nomura Titles Fixed income strategist Latin America Siobhan Morden writing :
“… Argentina [is] always the preferred high yield among investors dedicated to emerging markets. Investor sentiment of support for Argentina has enabled $27 billion in new issuance year-to-date in capital markets and a deluge of inflows into local markets. The central bank reverted to a net buyer of US dollars to avoid excessive currency appreciation. This reflects a positive circle of low refinancing risk and a reaccumulation of foreign exchange reserves which improves liquidity and solvency ratios.
However, we continue to monitor fiscal performance as the main medium-term credit constraint. There has been some pushback on austerity measures from the judiciary and coalition members, with the government announcing restrictions on the percentage increase in petrol prices…. There is still room to achieve the moderate fiscal deficit target for this year… The challenge is for 2017 with increasing dependence on an economic recovery and the trade-off between capital repatriation from the tax amnesty program and rising pensions and participation co-liabilities…”
Bond portfolio manager Carl Berger at Newton Investment Managementa BNY Mellon investment shop:
“Like many of its South American peers, Argentina is going through a sort of political transition. …[while] demand for its $12.5 billion issue in April, the largest emerging market debt sale on record, was so strong that Argentina was able to cut offered yields by 50 basis points and raise the deal size from $4 billion to $16.5 billion. .. the level of enthusiasm for the bond issue is in contradiction with Argentina’s status as an under-investment grade country and the macroeconomic obstacles it still faces. In the short term, the reforms implemented by Macri have had a positive effect by instilling a minimum of confidence in investors in a context of very degraded fundamentals. However, serious problems remain.”
See all our articles about investing in argentinaincluding 3 rating agencies on Argentina: still junk bonds, Argentinian bonds: 30% yield ‘most attractive’ in emerging markets? and El-Erian: Is Argentina’s return to the capital markets really a triumph?
Argentina’s debt represented 4% of the iShares MSCI Emerging Market Debt Listed Index Fund (EMB) as of July 1, 5.9% of the iShares Emerging Markets High Yield Bond ETF (EMHY) on July 1 and 3.8% of WisdomTree Emerging Markets Corporate Bond ETF (EMCB) to July 5. Argentina represented 3.7% of the Vanguard Emerging Markets Government Bond Index ETF (VWOB) and 6.3% of VanEck Vectors Emerging Markets High Yield Bond ETF (HYEM) as of May 31. The percentages are based on long positions in funds, according to Morningstar.com.