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Perspectives

Argentina: economic suffering and rebounding markets?

Jorge Amato

By Jorge Amato

Head - Latin America Investment Strategy

October 8, 2018Posted InInvestments and Investment Strategy

Argentina’s economy is in a funk. Inflation has spiralled out of control, having reached an annualized 34.4% in August 2018. A severe drought caused a more-than-one-third collapse in agricultural output, a key sector of the economy. Economic activity is estimated to have shrunk at 6.7% in June compared to the year-earlier period. as a result, Argentina is very likely in recession already. With fears over the sustainability of the country’s heavy foreign borrowings, its currency has shed more than half its value and hit a record low.

 

Still, Argentina has now won some breathing space. After intense negotiations, the International Monetary Fund (IMF) has finally granted a US$57.1bn funding package – its largest ever – to help Argentina meet its financing needs through 2019. Under the deal, the government will seek to balance its books next year and control the money supply in a bid to tame inflation. The immediate impact of the stringent fiscal and monetary tightening is likely to be a sharp economic contraction. The program’s longer-term success may depend largely on citizens’ willingness to bear the pain. Social discontent could conceivably test the government’s resolve to see the measures through.

 

Despite the economic hardship ahead for Argentina, we believe the outlook for its markets may be more positive. Asset prices have sold off deeply in anticipation of a very negative economic outcome. Thanks to the IMF deal, however, such a worst-case scenario now looks improbable. We thus believe a market rebound may be in store. External debt risk premia are already falling and may continue to do so in the coming weeks. We also favor selective buying of equities. Argentinian returns over the next six to twelve months could be attractive for investors with a high risk tolerance.

 

All forecasts are expressions of opinion and are subject to change without notice and are not intended to be a guarantee of future events.