Argentina's next president faces a rough road to restructuring
October 29, 2019 |
Alberto Fernández will seek a quick, market-friendly solution, but may have to ask bondholders to take a haircut
Argentina's political leadership is moving back to the left after a center-right coalition failed to pull the economy out of crisis and keep on top of debt repayments, but the next administration will not have it any easier, analysts told LatinFinance.
Alberto Fernández, a left-leaning moderate, won Sunday's election with 48% of the votes, defeating incumbent President Mauricio Macri, who garnered 40%.
While Fernández celebrated the victory well into Sunday night, he told supporters outside his headquarters in Buenos Aires that he will face challenges when he takes power on December 10.
"The times that are coming are not going to be easy," he said.
Regardless of who would have won, most analysts agree, it was never going to be easy for the next president. Argentina is entering its third year of recession; inflation has doubled to above 50% over the past year; poverty has surged to 35%; and the benchmark interest rate is touching 70%.
Additionally, the fiscal account is in deficit and the central bank has tightened controls to contain capital flight and shore up the peso, which has lost 34% of its value against the dollar since August. This forced the government to offer late payments on some sovereign bonds. Just as bad, a slowing global economy is threatening to reduce dollar inflows from exports and investment.
For investors, the immediate concern is what Fernández will do to manage the debt. The president-elect has said he prefers a quick and friendly restructuring similar to Uruguay's in 2003. In that case it extended maturities without a discount, a strategy that allowed the country to return to borrowing a year later. That would be better than a repeat of the drawn-out process that kept Argentina out of the international capital markets for 15 years after a $100 billion default in 2001, Fernández said a month ago.
Even so, "an extension of maturities may not be enough," said Ezequiel Zambaglione, head of strategy at Balanz Capital Valores, a brokerage in Buenos Aires.
"What the country needs is one to two years of liquidity," as well as reforms such to the labor and pension systems to cut public spending to achieve a fiscal surplus and revive the economy, he said.
One way to come up with this short-term liquidity is to ask bondholders to take a haircut, which they will not want to accept at first, Zambaglione said. "As time goes by and Argentina finds that it is unable to pay its coupons, more people are going to change their attitude."
Edward Glossop, a Latin America economist at Capital Economics in London, said that, while bondholders would prefer an Uruguay-style restructuring, a simple extension of maturities may not be enough to gain acceptance from the International Monetary Fund (IMF), with which Argentina has a $57 billion line of credit. Glossop said that he understands the IMF is withholding the latest tranche until it sees progress on the debt restructuring, meaning that they will have some influence on how it plays out.
Demand from the electorate for a speedy economic recovery may also put pressure on Fernández "to impose large losses" on international bondholders, limiting the impact on holders of domestic debt and at the same time securing funds to loosen fiscal policy to revive economic growth, Glossop said.
"It makes complete sense for Fernández to go that way," he said.
Fernández could spin it by telling bondholders that he was forced by the IMF to offer a big write-down, Glossop said, which could satisfy voters and allow the country to draw on the IMF credit line again. The IMF money is a cheaper source of financing than the 11% to 13% yields that Argentina would likely have to pay in the bond market. Argentina still has some $10 billion to $12 billion in credit from the IMF, and there is always the chance that the fund "might throw them a little bit more," he added.
This sort of debt restructuring deal would buy time for Fernández to build a fiscal surplus, allowing the sovereign to borrow in the markets again, he said. Glossup cited as an example Argentina's return to the markets with a 100-year bond in 2017 only a little over a year after emerging from the 15-year default.
Still, for any deal with bondholders, Fernández will have to show that he is serious about achieving a primary surplus to pay the debt, said Jorge Colina, an economist at the Institute of Argentine Social Development in Buenos Aires.
Colina believes it will take two years for the government to pull out of the financial crisis before it can turn its attention to encouraging investment to achieve economic stability and cut inflation. In the meantime, he expects high inflation and a hike in export taxes to boost state revenue, given there is not much margin to cut spending or increase taxes on the rest of the economy.
Esteban Fernández Medrano, an economist at MacroVision Consulting and GlobalSource Partners in Buenos Aires, said he expects the Fernández government to seek current account and fiscal surpluses and a weak exchange rate like the administration of President Néstor Kirchner from 2003 to 2007.
"They see these economic policies as the ones to shoot for so that, despite the crisis, they can achieve and maintain a fiscal situation that permits them to not depend too much on the capital markets," Fernández Medrano said. "But one thing is to have this as a desire, and the other is to actually achieve it."
He said investors will be watching to see who Fernández names to his cabinet and what influence the next vice president, Cristina Fernández de Kirchner, will have on policy. Fernández de Kirchner, who was president from 2007 to 2015, is farther to the left than Fernández, and her son, Congressman Máximo Kirchner, leads a more radicalized faction called La Cámpora that may want to influence policies or put people in power. This could be a source of tension in the government, following a historical pattern of fights between the president and vice president that has led to ruptures, Fernández Medrano said.
But one thing the next administration has going for it is that the manufacturing sector is running with 40% slack capacity, he said.
"Achieving a fiscal surplus and, at the same time, maintain a weak currency that permits a current account surplus without leading to a inflationary spiral is more feasible when you have slack capacity than if you don't," Fernández Medrano said. “It won't be easy, but that is the goal that Alberto Fernández has in mind."