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Guzmán gains time and power for IMF negotiations

Peso bounces after minister raises debt and signals orthodox turn

By | [email protected] | November 11, 2020 11:22am

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Martín Guzmán has repeatedly said in his interviews and press conferences since swearing in as Alberto Fernández’s Economy minister that one of his main goals would be to “tranquilize” the economy.

After two years of constant runs against the peso during the second half of Mauricio Macri’s presidential term, that might have been a welcome message for many Argentines, anxious about how unstable and weak their currency started looking all of a sudden since 2018.

But after some calm in the first few months of Fernández’s government, the peso-induced anxiety came back roaring in the second half of 2020, as the massive restrictions imposed on imports and foreign currency purchases inevitably started to leak into large black-market demand, putting the exchange rate value of the peso at near 200 to 1 per US dollar in the streets of Buenos Aires, a more than 100 percent difference with the controlled official rate of 80 to 1, only available to a select few.

Argentina's official and black-market peso-dollar exchange rate

Suddenly, all hell was breaking loose within Fernández’s economic cabinet, with mutual finger pointing between Guzmán and Central Bank chief Miguel Pesce looking for whom to blame, as the situation seemed to be spiraling out of their control.

Guzmán knew he would have to do something quick, before the political capital he gained after signing a deal with foreign bondholders to restructure part of Argentina’s dollar-denominated debt dissipated. His power was being eroded at the pace that the volatility he vowed to eradicate was returning to Argentine markets.

Raising debt

The Economy Minister is not a strong believer in the long-term usefulness of stringently restricting capital outflows, as Pesce might be, so the option of moving even further in that direction was off the table. The minister also ruled out a devaluation of the official exchange peso-dollar rate, which might have eased the need for restrictions on imports and capital outflows, knowing how unpopular these are among the general public.

The alternative Guzmán came up with was upping the pace of debt issuance even further.

Despite the selective default that came in the last few months of Macri’s administration, Argentina has not stopped raising debt in many respects. For starters, the Central Bank has upped the pace at which it is creating new peso-denominated short-term Leliq notes to absorb the Treasury’s emergency pandemic money printing.

Now, Guzmán has gone for more, issuing at least USD 3.4 billion in bonds tied to the value of the dollar, as well as selling an undisclosed amount of dollar-denominated Argentine bonds owned by the ANSES social security agency. Both of these moves have helped dry out the market of pesos, as investors were happy to latch onto dollar-denominated assets and get rid of their rapidly-depreciating pesos.

Re-directing this massive oversupply of pesos to these bonds has stopped the run against the currency in grey and black markets for the moment, with the peso-dollar exchange rate now closer to 150 to 1 mere weeks after almost reaching 200, and the gap between the official and parallel exchange rates dived from 135% to a still very high but less immediately alarming 85%.

A hand for trapped investors

The measures have not only brought down anxiety levels for Argentines who nervously follow the day-to-day gyrations of its currency, but have also brought relief for trapped investors whose investments in the country were in the red.

According to the Bloomberg financial news agency, money management giants Templeton and Pimco were among those for whom the auctions were designed, helping them “get rid of their peso holdings”, government sources said.

Of course, this will come at a cost for Argentina, as the dollar-linked bonds handed out to international investors would see its value rise in line with the devaluation of the official peso, which no one expects to remain fully stable.

The ANSES bond sales could be even more costly, as the AL30 bonds that the government has been inundating the market with currently yield around 15 percent in secondary markets. With these bonds no longer in the hands of the state, this is equivalent to raising new debt at 15 percent interest rates, an unsustainable figure for any country in the long term.

A turn back to orthodoxy

Guzmán, however, is hoping this will only be needed in the short term, and is now betting that a longer-term deal with the International Monetary Fund (IMF), coupled with an orthodox turn in the county’s fiscal approach, will significantly improve the market’s outlook for the country, gradually allowing it to stop raising costly debt or imposing draconian restrictions on capital movements. His successfull short-term bid to bring calm to black- and grey-markets has given him the time and power to attempt this.

This is why the minister said yesterday that the government is looking to secure an Extended Fund Facility agreement with the IMF, which would give Argentina closer to a decade to repay its IMF debts in exchange for a series of “structural reforms” that might include cutting spending, raising taxes and tariffs, as well as possibly making changes to the country’s labor and pension laws.

Guzmán has also promised to improve the fiscal targets of his 2021 budget, which already passed the House and is making its way through the Senate. Currently, the budget states that Argentina will be 4.5 percentage points of its GDP in the red, but Guzmán told businessmen last week that this would be de facto changed to something closer to 3.8 percent, as a signal of economic prudence, after a year in which spending went massively up with the response to the pandemic.

“If we can lower it even more in 2021 we will do it, but the minister is being prudent on not imposing drastic cuts that make the social situation worse. That is the spirit of the work that is being done. Guzmán knows that a having a well-balanced budget is a good thing,” sources at the Economy ministry argued.

Monday’s decision to eliminate inflation from the formula used to adjust pension payments goes in a similar direction, protecting the budget of the ANSES social security administration, a source of massive spending in the country.

Stock market bounce

So far, the markets have responded positively to Guzmán’s orthodox turn, with Argentina’s most important stocks seeing significant rises over the last few days. While the Merval stock market index gained 35 percent in the last two weeks of trading, up from 260 points to 354, leading stocks like Banco Galicia jumped by more than 50 percent, and state-controlled hydrocarbons firm YPF gained 60 percent, respectively aided by the rise in banking stocks and oil across the globe. (All of them are still extremely far from their peak values seen early in 2018.)

The question is will this prove to be sustainable? Or will it be similar to the short-lived bounce Argentine assets saw after Mauricio Macri started negotiating an increased aid package with the IMF in late August 2018? That deal, and then-minister Nicolás Dujovne’s austerity promises, kept the market afloat and recovering ground for several months, but started to struggle by the second quarter of 2019.

Guzmán will now have multiple simultaneous negotiations: one with the IMF, which is visiting Argentina this week, and one with his own voters and coalition members, which will naturally have many skeptics of the new package, after years of bad history between Argentina and the Fund.