In stark contrast to the deteriorating fiscal health of some the world’s most advanced economies, examples of positive reform-driven progress can be found across emerging market economies. Argentina is key among these. Christine Reed, Emerging Market Fixed Income Portfolio Manager at Ninety One, charts this remarkable turnaround story and considers the broader lessons for emerging market debt investors.
From an unloved destination to an unlikely poster child
Argentina’s debt has long been out of favour among many international investors, with various crises resulting in two defaults in the past few decades. But in the past year or so, an astonishing turnaround has taken place.
In the country’s 2023 elections, voters in Argentina initiated a trend that subsequently echoed across the globe in last year’s bumper election calendar: voting out the incumbent. Enter Javier Milei. Since taking office just over a year ago, Milei has moved swiftly to fix chronic imbalances and inefficiencies and shift Argentina’s economy onto a sustainable path. The sweeping (and ongoing) programme of reforms has been quick to take effect, as we chronicled throughout the year in our EM Debt Indicator – just a few excerpts are shared below:
• President Milei’s large fiscal adjustments are starting to feed through into economic data, with fiscal numbers for January showing a surplus. This helped the country’s hard currency bonds to stage a significant rally. (February 2024).
• Fiscal tightening measures under the Milei administration continued to feed through into the data in Argentina, which recorded a fiscal surplus for a fourth consecutive month. (April 2024).
• The fiscal adjustments seen in Argentina throughout 2024 continued, and are expected to persist into 2025, following President Milei’s announcement that spending and tax reforms will remain in place. […] reports of significant progress in negotiations between the government and the IMF on a new programme. (December 2024).
Unsurprisingly, this has put Argentina back on many investors’ radars. It has become an unlikely poster child for emerging markets.
Lessons for investors-Warning: look away now if you did not invest in Argentine debt in 2024.
Argentina’s external (US dollar-denominated) sovereign debt had an exceptional year in 2024. Behind the flagship EM hard currency debt market’s overall return of 6.5%, dispersion was wide; Argentina was a notable outlier, as shown in the table of the top and bottom three markets in the JP Morgan EMBI.
Source: JP Morgan, EMBI index. 31 December 2024. For further information on indices, please see Important information section.
It is worth noting that a key difference between top-performer Lebanon and Argentina is that the driver of Lebanon’s debt rally related to geopolitical headlines and domestic politics, and Lebanon’s debt is still trading at distressed valuations. In contrast, Argentina’s stellar performance reflects the positive shift in fundamentals, i.e., is more structural in nature.
While finding the ‘next Argentina’ is going to be tough – behind this remarkable transformation story lies a unique combination of factors (not least the strong mandate for aggressive fiscal tightening that the Argentine population awarded to Milei) – positive shifts are taking place across emerging market economies.
Motivated by economic crises and external funding pressure (such as the market turmoil seen in 2022) policymakers have responded with orthodox policymaking and bold reform packages, in many cases attracting significant multilateral support as a result. Examples include Kenya, Nigeria and Egypt, and Côte d'Ivoire – with Paraguay among countries to have been upgraded to investment grade by at least one rating agency. However, these rarely make the mainstream headlines.
One takeaway here is that conviction is key when investing in this diverse and under-researched investment universe. Conviction to invest where others fear to tread but where careful fundamental analysis reveals that risk is being amply rewarded. Conversely, conviction to stay away from markets where policy is heading in the wrong direction and the market is underestimating fiscal risks. And conviction to respond accordingly to a seismic shift in investment case – such as that seen in Argentina.
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