Ever since Argentina signed the reviewed stand-by agreement with IMF and the Central Bank (BCRA) leadership implemented a consequent monetary policy, the peso did not only reduce its volatility but appreciated by more than 10 percent, from a peak of roughly AR $42 pesos per US dollar to the current AR $37.4.
Besides that, there is another key economic indicator in the country that has so far refused to drop and has become and indicator that, for several investors and actors of the economic landscape, the revised IMF agreement and measures taken by the local government are not enough to convey the message that Argentina has left the worst behind: the so-called “country risk.”
The Bubble talked to economist Santiago Bulat to help our readers understand what the “country risk” is, why it’s not dropping, and the negative effects that it can have on the Argentine economy.
What it is
The country risk, Bulat explains, is the spread between Argentine sovereign bonds and the ones issued by the United States’ Federal Reserve. Since the latter are considered to be “risk free,” given its ability to pay them, the perceived risk from its counterparts – in this case, Argentina – will determine their interest rate.
The spread, calculated by JP morgan, reached a peak of 802 basic points at the end of August this year, when the peso suddenly lost roughly 30 percent of its value in two days. Following the reviewed agreement with the IMF, the index began to drop. But after hitting – a still high – 597 points on November 7, it bounced back during the past weeks and, at the moment this article is being written, stands at 684 points.
“Argentina issues public debt, but those who buy it are private agents. To get financing, it needs to renew its debt. The fact that the ‘country risk’ is high means that bonds have high interest rates and low prices. It can either be because there is not a lot of demand [for Argentine bonds] and/or because many people are selling their assets,” he explained.
When it comes to sovereign debt, Argentina is trying to “rollover” at least most of it: that is, get creditors to take more debt that is due further ahead in the future and continue receiving interest payments, instead of demanding the amount lent in the first place – i.e capitalizing.
If creditors collectively decide to capitalize the debt, Argentina would likely not have enough funds to meet all its financial obligations and default on its payments. “The Fund came out to cover up for the possibility that no-one rolls over their debt. Its money would be used in case that happened,” Bulat said.
However, if this effectively ends up being the case, most of the IMF’s disbursements will run out in 2019, and the electoral uncertainty that comes from the extremely contrasting economic models proposed by the different opposition candidates contribute to these high “country risk” figures.
Speaking at the Wilson Center in October, Frente Renovador leader Sergio Massa indicated that the next government – which he aspires to lead – should “re-negotiate the agreement with the Fund.” And, based on her many statements against the Fund and the Macri administration, former President Cristina Fernández de Kirchner would likely not intend to continue with the current economic model, should she decide to run and be elected next year.
Considering that the government’s image has been declining steadily since the beginning of the economic crisis, and that an eventual recovery would be tied with a better economic landscape, private actors are wary of making decisions looking beyond 2019.
In fact, according to Infobae’s Pablo Wende, this week bonds that expire throughout 2019 have an interest rate that is lower than five percent. But from that year on, the rate jumps to more than nine percent, and the Bonar 24 – which, as its name indicates expires in 2024 – has a rate of more than 11 percent. This not only affects the ability of the country to issue more debt, but also the provincial administrations and private actors, as their rates are closely tied to the federal government’s.
Another key factor affecting the bonds’ performance is the feasibility that the government will implement the austerity measures it committed to when signing the agreement with the IMF, and the recently-passed budget bill.
High interest rates and the recession resulting from the economic crisis, as well as the projected austerity measures can harm the government’s ability to collect all necessary taxes to reach its goal of eliminating the primary fiscal deficit. And since future disbursements from the fund are conditional to the government abiding by the agreement, the need to do so is imperative.
However, Bulat highlighted the fact that the agreement gives the government some wiggle room, illustrated in the possibility of using an extra 0.2 percent of the GDP on social spending and above all, that for the IMF, the stakes are also high. “Today, the IMF has agreements with 80 countries. Argentina’s agreement represents 25 percent of all funds allocated. It made a huge bet on Argentina. If they end up making all disbursement, the figure will be above 50 percent,” Bulat indicated.
The economist went on to explain that another detrimental factor for Argentine expectations is the more than likely regional competition that will come from Brazil as a result of Jair Bolsonar’s recent election. “Brazil is going for winner-take-all attitude and will implement measures [to attract investment], so how attractive is Argentina in the region if Brazil ends up doing that,” he said, making reference to the intention of Bolsonaro’s incumbent Economy Minister, Paulo Guedes, of deregulating the country’s economy, reducing the size of the state and eliminating the country’s fiscal deficit.
In regards to the impact of the measures taken by the BCRA’s new leadership, Bulat highlighted the fact that it managed to keep the exchange rate in the lower band of the “no intervention zone” and to not expand the monetary base. But at the same time, high interest rates are contributing to deepening the recession.
The bank has been reducing rates during the past weeks, since its peak of 72 percent for Leliqs to the current rate, which is roughly above 60 percent. The agreement with the IMF determined that rates should not be below 60 until inflationary expectations from the private sector were reduced for two months in a row, but Bulat indicated it looks like this will be the case. “They will probably take them below 60 after December 3,” when the next survey of economic expectations conducted by the BCRA, known as REM, is published.
Even though the agreement with the IMF gave the Argentine economy an extra dose of oxygen for next year, the market is already wary of what might come after.