Between A Rock And A Hard Place

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What's going on?

On Monday, Argentina introduced a new plan to rescue its struggling economy. The Argentine peso has dropped in value against the US dollar by more than 50% this year, and its slide is having repercussions on other emerging markets.

What does this mean?

Argentina suffered from a drought earlier this year, which resulted in the production of fewer soybeans, plums and peaches – important exports for a country whose economy is largely driven by farming. The new plan involves imposing higher taxes on those exports and making cuts to government agencies. That’s in addition to a $50 billion loan from the International Monetary Fund (sort of a bank for countries) that Argentina recently asked to receive more quickly.

Why should I care?

For markets: Other emerging markets are getting caught in the crossfire.

“Contagion” is when an issue – seemingly specific to one location – spreads to others. It’s likely the phenomenon that’s caused investors to sell their investments in multiple emerging markets, even if nothing seems to be wrong there – not just troubled South Africa (see below) and Turkey – because they tend to group countries with similar characteristics together, buying and selling them as a single group. An index of emerging market currencies (including Brazil, Indonesia, Mexico, and more) is headed towards its lowest value since 2017.

The bigger picture: South Africa’s economy is in a recession.

South Africa’s economy shrunk in the second quarter of 2018, according to data released on Tuesday. When an economy shrinks for two quarters in a row, it’s considered to be in recession (one’s a blip, two’s a problem) – and South Africa’s economy shrunk in the first quarter, too. Unsurprisingly, several investors made for the door and sold their investments in the country, including its currency. They might also be concerned about impending land reform (25 years after apartheid, white South Africans still own nearly three quarters of commercial agricultural land). Redistributing this land could disrupt the country and deter foreign investment – not exactly helpful in a recession.

Originally posted as part of the Finimize daily email.

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