As Argentina falls into economic chaos, fears of default are well founded. The peso has fallen more the 45% against the USD this year and official inflation is over 25%. The central bank’s futile attempt to fix things hiked rates 15% to 60% and promised not to lower before December. We doubt this will affect investors’ confidence or slow exodus of capital. Real interest rates are well below levels that would attract capital inflow.
“Contagion” is the talk, but we suspect that likelihood is extremely low. Following Turkey’s currency, collapsing markets are hypersensitive to the next emerging market fail. Argentina is a special case. Unlike Turkey, which is part of the MSCI Emerging Markets index and well entrenched in emerging portfolios, Argentina is categorised as a frontier investment.
Very select investors venture into this segment, they understand the risks, and they will backstop contagion concerns. That gives us time to worry about TRY, BRL and ZAR as America’s tighter money continues to pressure weak EM currencies.
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