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Argentina's problems don't end with its election
If you were to ask investors what the biggest risk facing Argentina is today, they would probably point to the return of former president Cristina Fernández de Kirchner.
Amid a broader sell-off in emerging market currency markets in late April, a single poll indicating brighter prospects for left-leaning Fernández set off a major rout across Argentine assets. Yields on short-term government debt traded to distressed levels, and most notably, the cost of insuring against an Argentine default surged, implying at one point as much as a 65 per cent chance of default within five years.
Given Fernández's dicey economic record and the fact that the IMF's largest programme in history could potentially be at stake if she were to be re-elected, it's no surprise that investors, and Argentines alike, are concerned. But look beyond October, and there's another risk brewing in the backdrop, regardless of who becomes president.
As Ed Glossop of Capital Economics points out in a new note, the government's external debt repayments are manageable in the immediate aftermath of the election. But in 2020, things look more "cumbersome."
This time next year, the government is due to make a $5.5bn payment on a domestically-issued bond. Foreign investors are owed $1.1bn in interest payments in June, and another $0.9bn and $1.1bn in October and December, respectively. Then in April 2021, the government faces a $5.5bn bill to repay the principal on another externally-issued bond.
Here's a chart from Glossop showing the repayment schedule through November 2021:
Repaying this debt in the most investor-friendly of circumstances (ie a Macri victory) might be possible, although, as former IMF and hedge fund-er Christopher Marsh warns in his blog The General Theorist, it still wouldn't be easy. In his deep dive into the IMF's latest review of its record $56bn programme in Argentina, Marsh points out the interesting fact that the Fund is building into its assumptions a 33 per cent depreciation in the peso against the dollar between 2019-2023. That is nearly double what the IMF projected in its first and second reviews.
Given that much of Argentina's debt is denominated in dollars and monetary policy remains ultra-tight, that poses quite the problem, per Marsh:
The assumed nominal exchange rate depreciation means the large share of USD-denominated public debt will continue to increase over the forecast horizon when measured in local currency, contributing to deteriorating debt dynamics.
That is nothing compared to what could happen should Argentina see the return of Kirchnerism. The country only has $72bn in gross foreign reserves, and roughly $22bn on a net basis. That's not a lot and, according to Glossop, they could be drained quite quickly:
But these would quickly dwindle under a leftwing government if strains in the balance of payments build and the central bank resorts to heavy FX intervention. Moreover, keeping the peso more stable with FX intervention would cause it to become overvalued. That in turn would store up an abrupt devaluation further down the line, triggering a surge in the local currency value of FX debts.
It is not difficult to see how this situation easily leads to a default.
Still, there's more than five months until the election, and a lot could change in the meantime. Fernández has yet to announce her candidacy, but based on the fact that she just published her autobiography Sincerely, a run seems all but confirmed. And if Macri is able to stabilise the peso and bring down inflation — two central issues consuming the electorate — his political prospects brighten dramatically, and so does the country's chances of repaying its debts later down the line.
(FT)
If you were to ask investors what the biggest risk facing Argentina is today, they would probably point to the return of former president Cristina Fernández de Kirchner.
Amid a broader sell-off in emerging market currency markets in late April, a single poll indicating brighter prospects for left-leaning Fernández set off a major rout across Argentine assets. Yields on short-term government debt traded to distressed levels, and most notably, the cost of insuring against an Argentine default surged, implying at one point as much as a 65 per cent chance of default within five years.
Given Fernández's dicey economic record and the fact that the IMF's largest programme in history could potentially be at stake if she were to be re-elected, it's no surprise that investors, and Argentines alike, are concerned. But look beyond October, and there's another risk brewing in the backdrop, regardless of who becomes president.
As Ed Glossop of Capital Economics points out in a new note, the government's external debt repayments are manageable in the immediate aftermath of the election. But in 2020, things look more "cumbersome."
This time next year, the government is due to make a $5.5bn payment on a domestically-issued bond. Foreign investors are owed $1.1bn in interest payments in June, and another $0.9bn and $1.1bn in October and December, respectively. Then in April 2021, the government faces a $5.5bn bill to repay the principal on another externally-issued bond.
Here's a chart from Glossop showing the repayment schedule through November 2021:
Repaying this debt in the most investor-friendly of circumstances (ie a Macri victory) might be possible, although, as former IMF and hedge fund-er Christopher Marsh warns in his blog The General Theorist, it still wouldn't be easy. In his deep dive into the IMF's latest review of its record $56bn programme in Argentina, Marsh points out the interesting fact that the Fund is building into its assumptions a 33 per cent depreciation in the peso against the dollar between 2019-2023. That is nearly double what the IMF projected in its first and second reviews.
Given that much of Argentina's debt is denominated in dollars and monetary policy remains ultra-tight, that poses quite the problem, per Marsh:
The assumed nominal exchange rate depreciation means the large share of USD-denominated public debt will continue to increase over the forecast horizon when measured in local currency, contributing to deteriorating debt dynamics.
That is nothing compared to what could happen should Argentina see the return of Kirchnerism. The country only has $72bn in gross foreign reserves, and roughly $22bn on a net basis. That's not a lot and, according to Glossop, they could be drained quite quickly:
But these would quickly dwindle under a leftwing government if strains in the balance of payments build and the central bank resorts to heavy FX intervention. Moreover, keeping the peso more stable with FX intervention would cause it to become overvalued. That in turn would store up an abrupt devaluation further down the line, triggering a surge in the local currency value of FX debts.
It is not difficult to see how this situation easily leads to a default.
Still, there's more than five months until the election, and a lot could change in the meantime. Fernández has yet to announce her candidacy, but based on the fact that she just published her autobiography Sincerely, a run seems all but confirmed. And if Macri is able to stabilise the peso and bring down inflation — two central issues consuming the electorate — his political prospects brighten dramatically, and so does the country's chances of repaying its debts later down the line.
(FT)
