Market Overview

Argentina ETF Decked By Interest Rate Spike

Argentina ETF Decked By Interest Rate Spike

It may be hard for investors in developed markets such as the U.S., Europe and Japan to fathom, but there are some countries around the world with high interest rates. There are high interest rate countries and then there is Argentina.

After last week's rate hike, Argentina, one of South America's largest economies, now sports a benchmark lending rate of 40 percent. That's 1,500 basis points higher than the 25-percent rate in Suriname, which has the second-highest rates in the world.

Argentina's rate hikes have been swift and substantial. Last week's hike took borrowing costs there from 33.25 to 40 percent.

A week earlier, Argentina's benchmark borrowing rate was “just” 27.25 percent. So it may not be surprising that the Global X MSCI Argentina ETF (NYSE: ARGT) is down 8.44 percent over the past month.

What Happened

ARGT, the largest Argentina-specific ETF listed in the U.S., tracks the MSCI All Argentina 25/50 Index. At the end of the first quarter, the ETF allocated 23.32 percent of its weight to financial services stocks — its second-largest sector weight — but investors should not apply the “higher rates are good for banks” theory to this fund, as its recent price action demonstrates.

At least one ratings agency revised its outlook on Argentina.

“The revision of Argentina's outlook to Stable from Positive reflects macroeconomic policy frictions and political headwinds that have intensified beyond Fitch's prior expectations, highlighting risks surrounding the gradual policy adjustment process,” Fitch Ratings said in a recent note.

Fitch rates Argentina's sovereign debt “B,” which is a junk rating.

Why It's Important

ARGT was one of last year's best-performing frontier markets ETFs due in large part to speculation that index provider MSCI could upgrade Argentina to emerging markets territory. While MSCI declined to do that last year, it kept Argentina on its list for a possible emerging markets upgrade.

Argentina's high inflation, which is even higher than Venezuela's, slumping currency and high borrowing costs could stand in the way of the country earning the coveted MSCI promotion.

What's Next

“Slow progress in the disinflation process and monetary policy shifts have highlighted frictions in the current policy framework that have hindered improvement in its credibility,” Fitch said. 

Argentina's inflation rate was 25 percent last year, well above the desired range of 12-17 percent. The current account deficit of 4.8 percent of GDP is another problem.

“The higher CAD reflects the country's reintegration into global capital markets and a rising investment cycle, but less benign trends are also contributing, such as surging outbound tourism that drove the services deficit to a record high,” according to Fitch. 

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