Argentina debt uncertainty piles on the agony for investors
With the inauguration of Argentina’s president-elect Alberto Fernández fast approaching, investors are scrambling to get a sense of what the future holds. Their concern is how the leftist Peronist aims to tackle the $330bn debt burden, most particularly that $101bn part of it that is due for restructuring.
In the time since last month’s elections when Mr Fernández clinched the presidency from incumbent Mauricio Macri, both administrations new and old have taken steps towards a smooth transfer of power on December 10.
Mr Fernández has announced a transition team of advisers to work with Mr Macri’s associates. Meanwhile, the central bank has tightened capital controls, in order to preserve the country’s shrinking coffers of foreign reserves, and lowered interest rates.
Investors welcomed the move to limit the amount of dollars Argentines could swap for pesos. They had warned that, with net reserves of less than $10bn by some analysts’ estimates, the country faces a severe cash crunch.
The outlook appears far from certain, say investors, with little indication still about what Mr Fernández will prioritise economically and what relationship he seeks to have with bondholders and the IMF. The fund extended Argentina a record $57bn bailout programme last year.
“We don’t have a single comprehensive macroeconomic and microeconomic policy plan,” says Alejo Czerwonko, an emerging markets strategist at UBS Global Wealth Management. “We have expressions of intent in certain areas, but there are several pieces of the puzzle missing.”
On the campaign trail, Mr Fernández railed against the IMF and Mr Macri’s decision to put in place severe austerity measures to meet the conditions of the bailout. The incoming president has promised instead to increase social spending to stimulate growth.
According to Axel Christensen, chief investment strategist for Latin America at global investment manager BlackRock, the need for clarity on the specifics of these plans is crucial, given the country’s tenuous financial standing and outlook. “You choose the indicator — inflation, growth, the level of reserves at the central bank — everything in Argentina is challenging at the moment,” he says.
The annual inflation rate stands cripplingly high at more than 50 per cent, while more than a third of the population is living below the poverty line. The unemployment rate is more than 10 per cent and the economy is submerged in a severe recession.
Mr Fernández’s unexpectedly strong showing against Mr Macri in August’s primary election had investors bolting for the exits.
The country’s dollar-denominated bonds plummeted in value, with the price of the once-vaunted century bond falling nearly 40 per cent in a matter of days to roughly 45 cents on the dollar. Just two years ago, investors flocked to snap up the debt.
Given that four-fifths of Argentina’s debt is denominated in foreign currency, the peso’s 20 per cent plunge against the dollar immediately after the primary election impaired the country’s ability to pay back its obligations.
Mr Macri was forced to enact a series of emergency measures, including capital controls, to stem the panic. He announced that Argentina would seek to postpone $7bn of payments in short-term local bonds and $44bn of loans from the IMF, and push for a “voluntary reprofiling” of $50bn of longer-dated debt, owed mostly to foreign investors.
Anupam Damani, a portfolio manager for US asset manager Nuveen’s global fixed-income team, says this challenging backdrop means Mr Fernández has to move quickly to lay out a credible economic plan and way forward on debt restructuring. This requires, she says, credible people to execute policy on both fronts.
“Argentina is in the emergency ward and the economy, which is the patient, is in critical condition and gasping for oxygen,” Ms Damani warns. “They do not have time to wait. They need to start engaging with the IMF and bondholders.”
Mr Fernández has previously endorsed a Uruguay-style restructuring. This would entail bondholders giving the government more time to pay back its debts without an explicit loss, or haircut, on their investments.
Unsurprisingly, investors are for this approach but sceptics say those terms may not deliver Argentina enough cash flow relief and are unlikely to win IMF backing.
Until an agreement is reached, says James Barrineau, a head of emerging-markets debt at asset manager Schroders, Argentina’s dollar bonds are likely to remain under pressure at a level of about 40 cents on the dollar.
“I don’t think anybody is going to want to buy the debt aggressively until we get some indication of what a recovery price might look like,” he says. “The price of the bonds right now is telling you the market is sceptical of a Uruguay-style restructuring.”