Argentina

Post-election outcome: higher political risk, double-dip recession, and unsustainable debt

Alberto Fernández, the 60-year-old former cabinet chief from 2003 to 2008, triumphed with 48% of the vote, while incumbent Macri’s centre-right coalition received 40.5%. Despite his defeat, Macri’s coalition should have a sizable weight in Congress (early results suggest slim Peronist majority) which could bring some balance to Fernandez’ interventionist agenda.

In the short-term, don’t expect a new major episode of market panic but prepare for prolonged volatility. Fernández’ victory had been largely priced in since August, and he has signaled his will to work on an orderly transition with Macri before taking office on December 10. Fernández will also have to put his heterogeneous coalition in order. The central bank has restricted dollar purchases even more starting today. 

Argentina is in a worst place than in 2015…: Debt-to-GDP ratio almost doubled during Macri’s mandate and is now close to 100% (76.8% debt in Argentina foreign currency denominated). Unemployment rate is at 10.1%, the highest level since the mid-2000s. After dropping to 25.7% in 2017, the poverty rate has now reached 35.4%. Macri has promised to deliver zero-poverty. Over the past 75 years, Argentina's economic and social performance has plummeted, it is the country whose GDP per capita has declined the most in the world

… and we see no sizable improvement in the short to medium-term: expect a protracted recession, and heightened political and sovereign risk

• a protracted recession (-3% this year, -4% next year)  as sharper financing conditions impact consumers and companies;
• political risk is likely to increase as a result of Fernandez’ election, weighing on business environment and non-payment risk; indeed the latest Peronist mandates were characterized by wild inflation, huge public deficits and unsustainable subsidies. Fernández has only sketched vague outlines of his economic policy, which centers on renegotiating debt, a national pact to control inflation and reviving growth by boosting domestic consumption (but there is very little leeway to do so). This clearly fits in our illiberal cycle narrative.
• a risk of a deeper public debt restructuring than the re-profiling announced by the current government, with haircuts on capital (Fernandez hinted at bond haircut of about 20%) or a disorderly debt default. Bonds are currently trading at 40 cents on the dollar. 

Only partial rebalancing achieved, the worst is yet to come

Argentina came under the spotlight in May 2018 as Emerging Markets (EM) as a whole paid the price of higher US interest rateThe financial sanction was more severe on Argentina (the peso’s value has been divided by two in the year to date). This is due to: (i) key monetary policy mistakes which confused markets at the end 2017 and early 2018; (ii) continued high vulnerabilities compared to other EMs (high inflation, twin deficits, large share of foreign-currency denominated debt).

The government requested a Stand-By Agreement (SBA) from the IMF and committed on a lower primary fiscal deficit target. In theory, Argentina’s financing needs were under control thanks to the USD50bn credit line. After market tensions temporarily eased this summer as a result, poor activity data releases and communication errors of the government precipitated a massive sell-off. An increase of the total credit line to USD57.5bn as well as a pledge to quicken disbursements stabilized the financial situation.

While still in recession, Argentina has partially rebalanced. It successfully achieved the IMF primary deficit target of -2.7% of GDP in 2018 (after -3.8% in 2017). Besides, the four-quarter cumulative current account deficit slightly decreased in Q3 although it still rose as a share of GDP (-6.3%); Q4 should be more encouraging as the four-year high trade surplus (+USD1.4bn) will help rebalancing. Indeed, imports on a rolling 12-month basis continued to contract; in December they stood at their lowest level since 2010. And we expect exports to moderately pick up. 

However, inflation is still very high (~55%) and the August shock will postpone the return to more moderate levels to the much longer term.