By Verena Wachnitz, portfolio manager of the T. Rowe Price Latin American Equity Fund
While the recent turmoil in Turkey has many idiosyncratic causes, the fallout has had an impact on Argentina, which shares similar vulnerabilities in the shape of twin deficits and large external funding requirements. After a month of relative calm for the peso, the Argentine currency has suffered renewed weakness in recent days amid investor nervousness surrounding the Turkish lira. This prompted a quick response by Argentine monetary authorities, which hiked short-term rates by 500bps to 45%.
The Central Bank of Argentina also announced a plan to wind down its short-term notes, known as Lebacs. The instruments, designed to stabilise local currency markets, were increasingly becoming a threat to financial stability after ballooning to $32bn – or 8% of GDP. While these are sensible measures in trying to weather the current storm, Argentina will continue to be at the mercy of global financial conditions as President Mauricio Macri and his team continue to address the underlying causes of its economic vulnerability.
Argentina needs to deliver on the fiscal adjustment it agreed with the IMF during its recent serious recession. While high real rates in this context may be necessary, they are a double-edged sword, as they weigh on activity levels. Until we see evidence of sufficient fiscal consolidation, we will remain cautious on the outlook for Argentina. In addition, the unfolding ‘notebook scandal’ in Argentina is showing similarities to Brazil’s Lava Jato in terms of its scope and implications. We are hopeful the impact on activity will be less severe than witnessed in Brazil, as the scandal primarily involves individuals from the previous Argentine administration – not the incumbent leaders as in the case of Lava Jato.
While these developments reduce the chances of a triumphant political return for ex-leader Cristina Kirchner, it is too soon to determine whether the scandal will boost the prospects of current president Macri. For Macri, the most important factor will be the evolution of the economy between now and the October 2019 presidential elections.