The Global X MSCI Argentina ETF (NYSEArca: ARGT), the largest US-listed exchange traded fund tracking Argentine equities, is down 12.30% over the past month, making it one of the worst-performing single-country ETFs over that period.
Argentina recently procured a bailout package from the International Monetary Fund (IMF), but that only sparked a short-term rally in the country’s financial markets.
The bailout package was a cause of contention for students and university professors who rallied in Buenos Aires to protest austerity measures, such as budget cuts to educational programs as part of the bailout. According to a survey conducted in May, 75% of survey respondents cite the IMF’s bailout funds as helping to spur the country’s financial crisis in 2001.
ARGT’s recent weakness could be a sign markets are not enthusiastic about Argentina’s new austerity plan.
“On 3 September 2018, Argentine President Mauricio Macri unveiled an austerity plan aimed at stemming recent severe pressure on the peso and reducing the fiscal deficit faster than initially planned under a three-year Stand-by Arrangement (SBA) with the International Monetary Fund (IMF) signed in June 2018,” said Markit. “Macri announced plans to eliminate the primary fiscal deficit entirely in 2019, a significant acceleration versus the 1.3% target initially agreed with the IMF. The radical approach has been forced by extreme peso weakness: this depreciated 15% last week, reflecting growing doubts by investors over the government’s ability to honor sovereign debt commitments due in 2019.”
Austerity Angle
In an effort to stem the slide in its peso and to rebuff persistently high inflation, Argentina’s central bank recently boosted interest rates to a staggering 60%, among the highest in the world.
“The Central Bank of Argentina (BCRA) responded by increasing interest rates to 60% (from the already high 45%), and establishing a new ‘encaje’ (increasing the proportion of bank deposits that need to be placed with the BCRA), in order to reduce financial-sector liquidity, but without any major recovery in the peso. The additional measures reflect that prior policy actions have failed to resolve investor distrust,” according to Markit.
Still, investors remain pensive regarding Argentine assets.
“However, according to our sources in Argentina, two fundamental items are still lacking: a solid long-term economic development program, and significant changes to Macri’s economic team,” said Markit. “Following the latest announcement, our sources commented that there was significant business and political expectation that important figures of the government would be rapidly removed to restore confidence, and that the government would reach a deal with moderate opposition Peronists in order to increase governability.”
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