The Global X MSCI Argentina ETF (NYSEArca: ARGT) is on fire again. The lone exchange traded fund tracking stocks in South America’s third-largest economy is up nearly 15% year-to-date after ranking as one of 2016’s best-performing emerging markets single-country ETFs.
Market observers seem inclined to wager that Argentina’s President Mauricio Macri could mean big changes in the economy after years of tepid growth. The pro-market Macri has pledged to quickly reverse much of the previous heavy-handed economic policies and open up the economy that has been posting back-to-back years of near stagnate growth, Bloomberg reports.
In the 14 years after Argentina carried out the world’s largest default, the Nestor Kirchner and Cristina Kirchner implemented a number of outdated policies, including a heavily regulated foreign-exchange system, seizure of privately-owned assets and under-reported inflation.
“Announcements this week by Argentina’s Macri administration could improve the accountability of fiscal consolidation goals, Fitch Ratings says. The strategy to achieve the targeted deficit reduction is not fully clear given that spending hikes and cuts were announced in the measures declared thus far,” said Fitch Ratings in a recent note.
Economic growth targets, if met or exceeded, could provide further upside to ARGT.
“The government reaffirmed a primary deficit target of 4.2% of GDP in 2017, and set targets of 3.2% in 2018 and 2.2% in 2019, above the targets set a year ago. The government also announced quarterly targets and enhanced fiscal reporting to improve transparency,” adds Fitch.
Argentina’s foreign reserves are at nine-year lows. Prices on the country’s commodity exports are down. The budget deficit is at its widest in three decades. Inflation is running at an annual pace of over 20%. Still, this is South America’s third-largest economy and home to abundant natural resources, levering the country to the rebounding commodities trade.
Although ARGT has been a hot trade, there are some risks for investors to consider.
“Besides the federal primary deficit, the rising interest burden and widening deficits at the provincial level are also putting pressure on the broader general government deficit and debt burden. Fitch estimates the general government deficit rose to 6.0% in 2016, from 4.8% of GDP in 2015, and will exceed 5.5% through 2018. This is high relative to a median of 4.4% among ‘B’-rated Fitch sovereigns,” notes Fitch.