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Argentina bearing the brunt of the investor fallout

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The pressure on emerging market assets has escalated in the past month, with Argentina bearing the brunt of the investor fallout. Of course, South Africa did not completely escape unscathed, as best evidenced by the weaker rand and higher local currency bond yields.

The pressure on emerging market assets has escalated in the past month, with Argentina bearing the brunt of the investor fallout. Of course, South Africa did not completely escape unscathed, as best evidenced by the weaker rand and higher local currency bond yields.

Our internal Emerging Market Risk Monitor, which tracks the fundamental health of a basket of emerging market sovereigns, has highlighted Argentina’s economic and financial market fragility relative to its emerging market peers for the past year, particularly pertaining to the country’s endemic inflation rate and twin deficits. This research has guided our big short in dollar denominated Argentinian bonds over this period.

Worth noting for South African investors are the parallels in Argentina’s and South Africa’s external account vulnerability to dampening financial market risk appetite. With large external financing requirements, both nations remain exposed to the threat of tightening financial market liquidity as the hunt for yield trade fades. Those nations with high foreign currency debt exposure are particularly vulnerable – and herein lies an important distinction between the two nations.

South Africa’s National Treasury liability management policy has been constructive in keeping a tight rein central government’s foreign currency debt levels. Further to this, our well-developed local currency bond market has been able to accommodate government’s funding requirements, resulting in South Africa’s foreign currency denominated debt amounting to just 5% of GDP. In contrast, Argentina’s foreign currency denominated debt ratio sits significantly higher at 22%* of GDP. Equally important is the gulf in monetary policy management – wherein South Africa ranks favourably relative to Argentina. While we highlight the threat posed to emerging markets broadly by tightening financial market conditions, these noteworthy difference will be telling for the eventual weathering of this storm.

 *The gross external debt figure includes actual current liabilities that require payments of interest and/or principal by Argentina’s central government at some point in the future. It excludes contingent liabilities.Source: Central Bank of the Republic of Argentina

Written by Yunus January, Interest Rate Market Analyst