The summer swoon in Turkey, which echoed to other EM currencies, could create long-term opportunities – such as in Argentina.
The summer swoon in Turkey has created a ripple of contagion to other emerging-market (‘EM’) currencies with weak fundamentals. Dislocations such as these may create compelling long-term opportunities, and we think Argentina is a case in point.
Figure 1. The Worst EM FX Moves in August 2018
Source: Bloomberg; between 31 July 2018, and 31 August 2018.
We’re not particularly surprised by the scale of the moves in Brazil (which has a divisive election coming up in October) or Russia (which potentially faces new sanctions). However, we’re surprised by the extent of the move in the Argentinian peso.
In contrast to Turkey, the Argentinian response to their crisis has been reasonably orthodox: it has raised interest rates aggressively to 60%, continued to implement market reform (the government passed a new capital markets law on May 9), secured support from the International Monetary Fund (‘IMF’), and embraced fiscal restraint (See Figure 2). Communication has sometimes been poor, and we think it is likely that the government will be forced to deliver more fiscal austerity to properly underpin confidence. But, broadly speaking, we believe the shape of the response has been orthodox, unlike Turkey.
Figure 2. Evolution of Argentina’s Budget Deficit
Source: Bloomberg; as of 31 July 2018.
There are two areas we are concerned about and are keeping a very close eye on.
First is the monetary base. Shut off from international markets, it looks as though the government has resorted to its original sin of printing money, as illustrated by the growth of base money in Figure 3. This is why the request on August 29 for early disbursement of funds from the IMF to cover 2019 financing is key in our view – it could help base money growth to ‘normalize’.
Figure 3. Growth of Base Money in Argentina
Source: Bloomberg; as of 29 August 2018.
Second, we are naturally concerned about politics. General elections are a little over 12 months away, and the deep recession that faces Argentina is a meaningful risk for current Argentinian President Mauricio Macri’s re-election. We think it plausible that Macri will step aside at the election, perhaps making way for the Cambiemos movement’s highly popular governor of Buenos Aires Province, Maria Eugenia Vidal. Polls in mid-August showed former President Cristina Kirchner to be less popular than Macri, and tainted by recent corruption scandals. But there is a younger generation of Peronists, and we are not dismissing the political risk.
So overall, in our view, macro fundamentals are not strong in Argentina. However, with the currency more than halving against the USD this year, we are not surprised. These moments of panic can create potential opportunities if we continue to focus on fundamentals.