Are we facing a classic emerging markets crisis? - Editor's Blog -

Argentina is in trouble. Investors have become more sophisticated but contagion cannot be ruled out, writes Brian Caplen.

In the 1980s and 1990s, a problem in Latin America prompted a sell-off in Asia, Africa and indeed anywhere falling into that loosest of loose categories 'emerging markets'. 

This time is supposed to be different. Debt to GDP in many emerging markets is about 20%. In many so-called developed markets it is closer to 100%.

Emerging market bonds are often issued in local currency rather than US dollars and with much longer maturities. There has been a lot of reform even if there is still much to do. Indeed, Argentina’s president, Mauricio Macri, has promised to make Argentina a normal country. 

But for the time being the headwinds of a stronger US dollar, high inflation and current account pressures have proved too much. The Argentine peso started tumbling (it has devalued 56% since Mr Macri took office), interest rates have been hiked to 40% and the politically charged notion of seeking IMF help is on the table. 

Dollar strength makes the carry trades that finance some emerging markets less attractive but investors should still be cognisant that few emerging markets are in a place as difficult as Argentina’s. They should not be selling indiscriminately.

Emerging markets specialist Exotix Capital screens frontier and small emerging markets by six criteria – external debt to GDP over 25%; current account and fiscal deficit over 3%; foreign exchange overvalued by more than 20%; inflation higher than 6%; and equity index at a 10% premium to price/book. Only Argentina went over the line on all of them but seven other countries are a concern on the basis of four of them — Pakistan, Egypt, Tunisia, Ghana, Kenya, Romania and Oman. 

Hopefully investors are paying due attention to the facts and investing for the long term. The overall thesis that the future growth opportunities are in emerging markets remains the same as it did prior to this latest Argentine crisis.

Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen

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