Argentina avoids new default, but problems stir elsewhere

Argentina avoids new default, but problems stir elsewhere

On June 22nd the economy minister, Martín Guzmán, announced that the government had reached an agreement with Paris Club creditors to avoid defaulting on July 31st, when the grace period on a US$2.5bn payment was set to expire. Although the development is positive, it is hardly a remedy for Argentina's ailing investment climate.

Indeed, the continued weakness of the business environment was highlighted just two days later, when MSCI, a US financial services company, downgraded Argentina from "emerging market" to "standalone market".

According to Mr Guzmán, Argentina has agreed to make a partial payment of US$430m in two instalments to avoid defaulting on its Paris Club debt. However, the debt-service relief will only be temporary, as the government will face a deadline of March 31st 2022 for either reaching a more comprehensive refinancing agreement with creditors or repaying the remainder of the debt in full. The Paris Club deal comes with the tacit understanding that Argentina will close a deal with the IMF by the end-March deadline as well.

In our view, the IMF deal will be essential to rebuilding confidence in Argentina's policymaking framework.

Wavering investor sentiment came to the fore on June 24th, when MSCI announced that it had dropped Argentina from its "emerging market" category. The move is significant because MSCI is the world's largest index provider and its indices are used by major asset management firms to make their investment decisions. According to Craig Feldman, a member of the MSCI Index Policy Committee, the stringency of capital controls (in place since 2019) with no resolution was not in line with the market accessibility criteria of the MSCI Emerging Markets Index.

The blow to Argentina was even worse than expected, as most market analysts had expected a downgrade to "frontier market" (Argentina's classification in 2009-18), rather than "standalone market", a category that also includes Jamaica, Panama, Ukraine and Zimbabwe. The change will leave Argentina's financial assets off the radar of many institutional investors. The three domestic companies that were still part of the MSCI Emerging Markets Index—Globant, Adecoagro and YPF—will be the hardest hit, with forced portfolio divestment from these firms amounting to US$610m this year.

Now that access to foreign capital will be even more restricted after the MSCI decision, signing a deal with the Fund is growing more imperative. We continue to assume that a deal will materialise.