Investors rush for the exits in Argentina

895_MW_P06_Markets — A lack of progress: Argentine President Mauricio Macri, with his wife Juliana Awada

"The past few weeks have seen a delayed reaction to the election of Donald Trump," says John Authers in the Financial Times. Emerging markets looked vulnerable in late 2016 because Trump's planned fiscal stimulus implied higher US interest rates and a stronger dollar. These make US assets more appealing, prompting investors to ditch riskier ones such as developing-country equities and debt. Money then leaves emerging markets and rushes back to the US. His protectionism, moreover, would hit emerging markets disproportionately because they are more exposed to global growth than their developed counterparts.

Nothing much happened in 2017, so bullish investors continued to pour into emerging-market assets. But now protectionist rhetoric has intensified and the tax cuts have finally being passed. This has compounded worries that the robustly growing economy could overheat, triggering unexpectedly quick interest-rate rises. These factors have bolstered the dollar, a trend given additional momentum by the euro going off the boil amid an apparent slowdown of the eurozone.

From darling to dud

When the trend changes and these headwinds emerge, investors become far less tolerant of the asset class in general and will punish particular economic and political weaknesses and mis-steps they might have overlooked in the good times. An index tracking the performance of emerging-market currencies has slumped in the past month; a gauge of developing-country debt is back to November 2016 levels. Some countries have suffered major outflows and currency turbulence.

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Enter Argentina. Last summer, investors were happy to snap up its 100-year government bond despite continual political turbulence and a lousy credit history. Now, global investors can't find the exit door fast enough. Stocks are down by a fifth from January's record high. The currency, the peso, has hit a series of record lows against the dollar in recent days. The central bank has pushed through three shock interest-rate hikes from 27.5% to a drastic 40% to stem the exodus.

Losing patience with Macri

"The market-friendly Argentina investors were promised hasn't entirely materialised," say Will Mathis and Ben Bartenstein on Bloomberg. President Mauricio Macri hasn't made as much progress on reforming the economy as people were hoping. The primary budget deficit (excluding high interest payments) remains high at 4% of GDP. The current account deficit is almost 5% of GDP.

An external deficit always unnerves markets, as it means that a country is in debt to the rest of the world and needs to borrow from abroad to fund its growth. So it is especially vulnerable to global capital flows and sentiment overseas. Mixed messages from the central bank have been a major irritant, undermining belief in its anti-inflationist credentials. Prices are still rising at an annual rate of 25%. And while Argentina battles, investors are wondering if the crisis could spread.