The Argentine peso hit its lowest point in more than four years on Wednesday, while credit default swap spreads have widened around 80 basis points so far this week, as the country’s assets suffer much heavier contagion than other emerging markets from fears over US credit risk and its effect on global liquidity. This is despite government forecasts of 8% GDP growth for 2007, and a current account surplus of $861 million in Q1 2007.
“The recent pull-back is seen a function of a herd pull-out by both fast and real money from local peso financial assets and no help from BCRA intervention,” said Nick Charnie, head of emerging markets research at RBC Dominion Securities in Toronto. “Behind the negative mood towards Argentina are concerns over government financing amid a deteriorating risk backdrop globally, uncertainty over the economic impact from the energy crisis and expectations of market-unfriendly economic policies continuing during the next presidency,” he added.
A number of Argentine ex-policymakers told Emerging Markets last week that current growth-oriented policies, focused on an artificially weak exchange rate and an expansionary fiscal stance, would continue after the presidential election in October 2007, if front-runner Cristina Kirchner wins power (see “Argentina financing crunch imminent, analysts warn”). Moreover, although sentiment towards high-risk assets in general is suffering – the spread on the JP Morgan EMBI Global Diversified (GD) index has widened by around 30 basis points this week – Argentina could be particularly at risk if its financing needs rise sharply due to a pre-election spending surge.
The high yields that Argentina has to pay to refinance its debt are becoming a concern for Edwin Gutierrez, emerging debt portfolio manager at Aberdeen Asset Management in London. Aberdeen had been Argentina bulls until relatively recently: Argentine assets composed around 13.4% of their portfolio in early July, the largest single country holding, and representing an overweight position of more than 10% relative to the JPM EMBI GD.
“We still think the peso and bonds are fundamentally undervalued, so there could be a buying opportunity further ahead. But for now, this market has further to fall, especially with crossover investors pulling out,” Gutierrez told Emerging Markets.