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  • Emerging Markets Debt Daily

    Argentina—Bracing for Policy Discontinuity

    Natalia Gurushina, Economist, Emerging Markets Fixed Income
    August 12, 2019
     

    The opposition’s shockingly strong performance in Argentina’s primary elections increases the risk of policy discontinuity. A big drop in China’s July credit impulse reflected lower shadow financing.

    Argentina’s primary election results shook the market this morning, as the opposition’s unexpectedly strong performance (15% margin) opens up a possibility of first-round victory in the presidential elections in October. With polling results so off, the market is now pricing in a much higher risk of policy discontinuity after the elections, including debt reprofiling/restructuring and capital controls. The central bank will try to minimize the damage by tightening its policy stance and conducting monetary currency interventions, but we might be in a different reality right now (the currency was down by 20% after the opening).

    The escalation of tensions in Hong Kong (clashes with police on Sunday, the protesters occupying the international airport on Monday) adds to market concerns about China-related tail risks, especially the growth outlook. A big decline in China’s July credit impulse (monthly total social financing halved vs. June), therefore, deserves a closer look. Details point to a sizable drop in shadow financing—a gutsy (and welcome) structural move. At the same time, trade tensions affected sentiment and demand for business loans, while smaller companies were disproportionately hit by credit events in several regional banks. This highlights the need for more stimulus, but also for further reforms to improve the transmission mechanism in the economy.

    Russia’s stellar monetary and fiscal policies got a nod of approval from Fitch, which raised the country’s sovereign rating by one notch to BBB with stable outlook. One area where Russia is still lacking is growth. Today’s preliminary Q2 gross domestic product (GDP) growth of a mere 0.9% year-on-year proves the point, a small upside surprise notwithstanding. Russia’s super-low debt/GDP ratio and fiscal surpluses help to reduce market pressures. But the low-growth environment also limits potential upside for the currency and stocks.

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