Argentina finds it harder to stick to IMF bailout plan
Argentina may have reluctantly fallen back into the embrace of the International Monetary Fund, but the biggest aid package in history has not managed to inoculate the country from an onslaught of market pain.
Many investors felt reassured when Argentina received a $50bn credit line from the IMF in June and President Mauricio Macri followed through on mandated reforms to slash the fiscal deficit and tame inflation.
Yet the recent turmoil in emerging markets has since muddied the outlook and called into question how Argentina will meet its $82bn financing needs for this year and next, while navigating a looming recession and rising consumer prices ahead of a presidential election in 2019.
While most investors believe that policy continuity is crucial if the economy is to normalise, the turbulence roiling emerging markets adds additional hurdles to an already-treacherous obstacle course, according to John Baur, a portfolio manager at Eaton Vance.
“With the external environment and the uncertainty about where the [Argentine] peso is going to end up, it’s just too hard to say if they can meet their IMF targets,” he said.
Argentina’s currency has weakened more than 9 per cent against the dollar since the start of the month, cementing its position as one of the biggest losers in the broader EM rout triggered by the Turkish lira’s tumble. The Banco Central de la República Argentina (BRCA) moved quickly to shore up the peso last week, hiking its benchmark overnight interest rate five percentage points to 45 per cent.
“It was a necessary move,” said Stuart Culverhouse, chief economist at Exotix, a frontier-market boutique investment bank. “As the currency weakens through this contagion, it’s going to put the country further at risk of not meeting the IMF’s inflation target.”
In July, consumer prices rose 3.1 per cent, bringing the 12-month inflation rate to 31.2 per cent, about 10 percentage points above the IMF’s 2019 target. “Without the ability to arrest inflation,” added Mr Culverhouse, “Argentina won’t have credibility with investors.”
The country’s short-term debt obligations pose another problem. Between this year and next, Argentina has roughly $50bn of peso and dollar-denominated debt coming due. The bulk are peso-denominated Lebacs, which are fixed-rate bills issued by the central bank with yields as high as 52 per cent. Following monetary tightening in December 2015, investors piled into these instruments, which have maturities as short as 35 days.
At its peak, the amount of Lebacs in circulation exceeded $60bn. Although the market has since shrunk to about $21bn, rolling over this debt has become a major source of market anxiety as investors gauge each auction’s success.
“It’s like groundhog day,” said Walter Stoeppelwerth, head of research at local investment bank Balanz Capital. “Having an enormous portion of your monetary base maturing every 30 days is extremely dangerous when you’ve got a currency crisis.”
Unwinding the stock of short-term Lebacs is an important condition of the IMF’s package. Last week, the central bank announced it would eliminate them by year-end and is encouraging banks to invest in longer-dated, peso-denominated instruments instead. Only mutual funds, insurance companies and retail investors can roll over some Lebacs. Also on offer from the Treasury are Letes, which are notes with maturities as much as 10 times that of Lebacs.
“Argentina needed to do this in order to kick-start its own domestic capital markets,” according to Mr Stoeppelwerth. The only mistake, he said, is that the central bank did not do it sooner. Now, there is a confidence crisis, leading more investors to hold dollars than buy longer-dated local securities, which puts pressure on the peso.
Because the majority of Argentina’s debt is dollar-denominated, a 10 per cent depreciation from current levels would increase its debt-to-GDP ratio by five percentage points, according to Guillermo Tolosa, an economic adviser at Oxford Economics. By year-end, Mr Tolosa forecasts that Argentina’s debt will exceed 71 per cent of its annual economic output.
Reducing the fiscal deficit will ease this financing pressure. The government is on track to meet the IMF’s fiscal deficit target for 2018, but to balance the budget by 2020 as indicated, Mr Macri will have to slash more.
Mr Macri is moving ahead with plans to reduce public investment and lower subsidies for electricity and gas. But analysts now forecast a sharper recession and rising consumer prices as a result — ahead of a pivotal general election next year.
It was long an article of faith that Mr Macri would romp home for a second term in October 2019. But austerity has seen his approval ratings slump to about 35 per cent from over 50 per cent at the start of this year. Furthermore, the possibility that a corruption scandal around Cristina Fernández, the former president, could see a more moderate and electable candidate emerge from the opposition Peronist party has further unsettled investors about Mr Macri’s re-election prospects.
“The authorities are walking a bit of tightrope,” said Andrew Brudenell, a frontier markets portfolio manager at asset manager Ashmore, who recently scaled back his fund’s exposure to Argentina. “Moving from an inflationary-driven, consumption-led story to an economically-orthodox one is a very difficult task when you only have some political capital to spend.”
Charles Newbery & Colby Smith