Last year, we looked at Argentina’s pro-market president Mauricio Macri’s impact on the economy. While some progress had been made in removing isolationist policies and taming the country’s runaway inflation, 2018 could prove to be a critical year for Argentina as voters and investors demand tangible results.
We believe a successful year for Argentina hinges on five key themes: generating strong economic growth, taming inflation, building political support for new policies, attracting foreign capital, and achieving a market reclassification.
Generating Economic Growth: GDP contracted 2.3% in 2016, before recovering in 2017 to achieve an expected 3% growth rate.1 The government expects growth to accelerate to 3.5% in 2018, which will be critical for both helping to reduce the country’s budget deficit and to attract foreign capital. Ultimately, economic growth will be substantially affected by rising commodity prices, the successful implementation of pro-growth reforms, controlling inflation, and falling unemployment.
Taming Inflation: Since Macri took office, inflation in Argentina has fallen, but not by as much as many had hoped. In 2016, Macri’s first full year in office, inflation was approximated at 40%. In 2017, inflation estimates fell to around 24%, but the removal of energy subsidies put upwards pressure on living expenses.2 Given the fragile state of Argentina’s economy, there is a debate around whether the central bank should lower interest rates to stimulate growth or keep rates high to tackle inflation. While the original inflation target for 2018 had been set between 8% and 12%, the central bank has recently revised the target to 15%.3 If Argentina can achieve this target and set up a downward trajectory for inflation beyond 2018, the country could benefit from a more stable currency, more foreign capital and an overall stronger economy.
Building Political Support: We’d be hard-pressed to find a country where politics will not be a major factor in 2018, but nonetheless it remains top of mind for Argentina. Macri’s coalition strengthened its position during the 2017 mid-term elections, but will need to maintain support from voters as it implements unpopular, yet prudent policies in 2018. Such policies include new changes to the country’s tax code, pension reforms, and the removal of transportation subsidies, all of which are designed to help the country reduce its budget deficit and achieve more sustainable growth. If Macri struggles to effectively sell these reforms domestically, these policies could hurt him in 2019 presidential elections.
Attracting Foreign Capital: One of Macri’s major accomplishments since taking office has been settling the country’s debts with foreign creditors and removing currency controls. As a result, Argentina has been able to return to the global capital markets and more easily attract capital from foreign investors. In 2018, the country expects to fund approximately 40% of its deficit with foreign currency bonds, amounting to approximately $12 billion.4 In addition, some Argentinian companies, like Corporacion America, are looking to IPO outside of the country to raise capital to fund future growth.5 Successfully attracting foreign capital will be key to achieving economic growth for a country that has suffered from years of under-investment.
Achieving a Market Reclassification: In 2017, index provider MSCI reviewed Argentina for a potential reclassification from ‘Frontier’ to ‘Emerging’ market status. Such a reclassification could potentially spur significant inflows into Argentina’s capital markets, given that over $1.6 trillion is benchmarked against the MSCI Emerging Market Index.6 While MSCI ultimately decided not to upgrade Argentina last year, the decision will be revisited this year, with an update likely coming in June 2018. While Argentina’s government cannot control MSCI’s decision, continued pro-market reforms, political stability, and further opening of the economy to foreign investment could help their efforts to achieve Emerging Market status.
These five key themes for Argentina are interrelated, highlighting just how important they all are to the success of the country. If any one of them falls far short of their goal, there could be a cascading effect that cripples the economy. For example, unusually high inflation could scare away foreign capital, which hurts economic growth, and sows the seeds of discontent among the voting public. However, if the recovering economy can score well on each of these key themes, there could be a self-reinforcing effect that propels the economy to long term, sustainable growth. For these reasons, we believe 2018 will be a pivotal year for Argentina and its future trajectory.
ARGT: The Global X MSCI Argentina ETF invests in among the largest and most liquid securities with exposure to Argentina.
Click on the fund name above for current holdings.