Argentina is on a solid growth path, as economic growth in the country increased from 0.4% in the first quarter of 2017 to 2.7% in the second quarter.
This is according to the latest commentary from J. Safra Sarasin's emerging market credit strategist Eliseo Sempere, who sees Argentina as an improving story in Latin America.
'The strong increase in imports (9.1% year-on-year) led to the further widening of the trade balance deficit, currently at $4.5bn (January-August) versus a $1.7 billion surplus in the same period last year.'
Sempere said the sectors that grew the strongest in the second quarter were construction (9.7% year-on-year, up from 2% in the first quarter) and manufacturing (2.5% year-on-year, up from -1.8% in the first quarter).
According to the strategist, Argentina is currently running twin deficits, as the current account (-3.4% of GDP) and fiscal balance (-1.9% of GDP) are both in negative figures.
‘This is largely financed with sustained issuance of hard currency debt, which increased to a total of $205 billion in the second quarter of 2017, up from $176 billion a year ago,’ Sempere said.
Eyes on parliamentary elections
Sempere highlighted that the approval ratings of the ruling party, Cambiemos, are improving, making it all the more t likely that the party will stay in power after the parliamentary elections on 22 October.
He added that the country has been one of the best performing markets in Latin America, with corporate spreads compressing by 132 bps.
‘We see support for further spread tightening should parliamentary elections come in line with expectations and the government deliver on the expected reforms. We see provincial debt as attractive given the large spread pickup to sovereign bonds.’
In his latest commentary, CIO of Lombard Odier Stéphane Monier also expressed the view that Cambiemos is on course to win, enabling president Macri to implement his structural reforms.
'In the upcoming elections, one third of the seats of the senate and half of the house of representatives will be renewed. While Macri will probably still fall short of a legislative majority in October, we think that the influence of Kirchner will be reduced and the opposition will be divided.'
Inflation on target
Monier said that Macri had successfully addressed the monetary issues faced by the country and had developed an inflation-targeting framework.
'Inflation went from 45% in June 2016 to 23% in August 2017. While GDP fell by 2.3% in 2016, we expect the economy to grow 3% this year.'
He added that foreign investments in the country are increasing, with BP, Total, Wintershall and Argentina’s state-run oil firm YPF making a $1.15 billion joint investment in the Vaca Muerta shale formation.
'The increase in investments could support under-leveraged private sectors with a private debt-to-GDP ratio of only 26%,' Monier said.
However, he added that one of the biggest challenges for the country might be political polarisation.
'The main challenge facing Macri is achieving economic normalisation by minting the disinflation process, by attracting foreign investments and by maintaining his popularity.'