Amid a plunging currency, a scorched earth campaign to boost interest rates and bailout concerns, Argentina was home to some of 2018’s worst-performing equity markets. While 2019 is still in its nascent stages, stocks in South America’s second-largest economy are rebounding.
The Global X MSCI Argentina ETF (NYSEArca: ARGT) and the iShares MSCI Argentina and Global Exposure ETF (BATS: AGT) are both sporting double-digit year-to-date gains, but some analysts see lingering fiscal risks for Argentina’s economy.
“Argentina met its fiscal deficit target last year, but risks to hitting future targets remain significant,” Fitch Ratings said in a recent note. “These include revenue losses from the economic recession, spending pressures from a surge in inflation in 2018 and the upcoming election cycle.”
Growth may remain muted ahead as the Argentine government tightens its belt to get on the good side of the international institutions. For example, the IMF has required the government to make deeper spending cuts and increase taxes to bring its primary fiscal deficit, which is expected to hit 2.7% of GDP for 2018, to zero next year, Forbes reports.
Declining Deficits
In more positive news, recent data indicate deficits are declining in Argentina.
“Data released last week showed that the primary federal government deficit fell to 2.7% of GDP in 2018 from 3.8% in 2017. This was in line with the target in Argentina’s IMF program, which also captures some capital spending that previously was not recorded in fiscal statistics. The improvement reflected lower growth in primary spending (22%) compared to revenues (30%). This offset a jump in interest payments and reduced the total deficit to 5.5% from 6.0%,” according to Fitch.
Argentina’s central bank has been active in attempting to stem the peso’s slide and curb inflation, fiscal challenges result from that tight monetary policy.
“Third, the central bank’s recent success in containing money supply and peso volatility could reduce inflation, but this poses fiscal challenges,” said Fitch. “The surprise surge in inflation in 2018 helped reduce the deficit by lifting revenues more quickly than spending. This lag effect will reverse as inflation falls. Social benefits, already 57% of primary spending, could grow in real terms as a result given their indexation to past inflation.”
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