The Fed taper is not the only concern bothering the emerging markets. Political and economic threats often weigh on the prosperity of these nations.
Among other vulnerable emerging market nations, Argentina has been in the spotlight as its currency plunged around 15% as of late. The fall marked the biggest currency tumble in more than a decade and could spell doom for the country (read : Should Investors Avoid Emerging Market ETFs in 2014?
The government, however, shocked the markets this time around with its sharp intervention. The Argentinean government rolled back some of the controls imposed earlier. This comes after two long years of restrictions on U.S. dollar purchases.
The government has again legalized the purchase of dollars for savings accounts albeit with some restrictions. Only citizens who earn more than 7,200 pesos ($899) a month are eligible to apply and can buy up to $2000 per month. Thus, large firms and wealthy investors would not be able to make huge purchases.
The government is known to intervene in the currency market to support its ailing currency. Strict restrictions were earlier placed on the purchase of dollars. The government also taxed citizens on credit card transactions made abroad and on online shopping on foreign websites (read: Obama's Second Term has been Great for these ETFs
The sudden move made by the government is aimed to reign in the black-market demand for dollars and arrest further depreciation of the peso. Though the peso is trading near 8 per dollar in the official currency market, it stands near 12.30 per dollar in the black market. Restrictions on dollar buying by the government are believed to be the main reason for the active black market.
The government has already depleted its foreign currency reserves to around $28.9 billion, a 32% plunge in the last one year and the lowest level since 2006.The Flip Side
Market experts believe that the recent measure along with the government's ongoing steps to inject more dollars into the economy to arrest a further fall in the peso will worsen its foreign reserves.
Also, the presence of two currency markets, the official and the underground, is a cause of concern. Argentines are paying a hefty 50% premium to the official exchange rate to obtain a dollar in the unofficial market. This goes to reflect the falling confidence in the economy.
The inflation rate in the country is around 30% - one of the highest in the world - although the official inflation figure reported is almost half. The current currency slump is expected to put further pressure on inflation, as the price of imported goods will rise.
The astoundingly high rate of inflation is believed to be the consequence of the government's action of printing money in order to pay its import bills. Following a default in 2002, Argentina was barred from borrowing from the overseas markets. This resulted in an extremely sluggish pace of growth for South America's second largest economy.
In a nutshell, massive monetary expansion led to high levels of inflation and a huge level of depreciation for the peso (read: Survive the Slump with These Inverse Equity ETFs
).ARGT in Focus
The impact of the monetary crisis was clearly reflected in declining interest in Global X FTSE Argentina 20 ETF
), the only ETF focused on this Latin American nation (see all the Latin American Equity ETFs here
Though the ETF returned around 10% in 2013, it has erased almost all its gains in the last few weeks.
The ETF has plunged around 12.4% in the past month. Moreover, the ETF is currently trading below its 50-day and 200-day moving averages, suggesting more weakness ahead. This is especially true if the peso continues to fall, as this will result in lower returns when translated back to dollars.
Investors might continue to face volatility unless the fall in the peso is arrested. Also, we currently have a Zacks ETF Rank of 5 or 'Strong Sell' rating on ARGT, so we are looking for weakness over the long term too.Conclusion
Though the government's step to let the peso fall last week signals its move towards a floating exchange rate policy, which would improve the country's competitiveness, there are chances of the peso falling further against the dollar. This might intensify the already high inflation rates.
The government needs to take some serious fiscal and monetary tightening steps to reduce inflation, and until then ARGT is a definite avoid.
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