Argentina has much in common with yesterday's emerging markets, but little in common with today's
Yawning deficits, stubborn inflation, a plunging currency, spiking interest rates, dwindling reserves and a humbling turn to the IMF. Argentina seems to be going through a classic emerging-market crisis, culminating in the government’s decision this week to seek a precautionary loan from the fund—an institution that fears Argentina almost as much as Argentina fears it.
The country is not quite repeating its own crisis-ridden history. Argentina today has a reformist government largely intent on doing the right thing, rather than the populist administrations that blighted its recent past. But its troubles are real. Many wonder if they will spread to other emerging markets. Several economies share one or two of its vulnerabilities. Mercifully few share all of them.
Argentina’s rate of inflation, which exceeds 25%, seems to belong to a lost world. Only in Egypt, Nigeria and Turkey (among notable economies; Venezuela is on a different planet) is inflation even in double digits. It is now comfortably below the government’s target in Brazil, China and Russia (among other places) and uncomfortably below it in Thailand. These countries’ monetary authorities have already won the battle for price stability that Argentina is still waging.
In several emerging economies, including Brazil, Egypt and India, the government finances are, if anything, worse than in Argentina. Brazil’s fiscal deficit is projected to exceed 8% of GDP this year, according to the IMF, compared with an overall deficit of 5.5% for Argentina. But even as these other countries’ governments live far beyond their means, their private sectors are living well within them. For that reason, their large fiscal deficits have not translated into equally large current-account deficits with the rest of the world.
And although many emerging markets have heavy debts, they do not share Argentina’s old-fashioned need to borrow in other countries’ currencies. Almost 64% of Argentina’s combined government and corporate debt is denominated in dollars and other foreign monies, according to the Institute of International Finance. Among the big emerging markets, only Turkey compares, with 56%. The equivalent figure for Thailand is 17%, for Brazil only 16%.
Low inflation, modest current-account deficits and limited foreign-currency debt thus distinguish many of today’s emerging markets from the peso—and from their own past. These attributes do not render them immune from the global financial forces that have rocked the peso. All emerging economies, even the biggest, must still watch the Federal Reserve, rising American bond yields and the strengthening dollar with trepidation. In many cases their long-term interest rates seem as sensitive to America’s central bank as to their own.
But their new virtues do give emerging economies more room for manoeuvre. They can ease their own interest rates if borrowing costs rise too much. And if capital flees they can allow their currencies to fall without the economy faltering. That is because they need not worry that a one-off rise in import prices will translate into ongoing inflation or that a weaker exchange rate will render dollar debts impossible to service.
The distinctions between Argentina and the broader group of emerging markets have not gone unnoticed. In 2009 the country was even reclassified as a “frontier” market by MSCI, an index provider. But in its struggles with inflation, deficits, dollar debt and depreciation, Argentina’s economy resembles a classic emerging market more faithfully than many economies that still carry the label.