Argentina

Corporates facing the worst, expect slow rebalancing

C4

High Risk

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD637.59bn (World ranking 21, World Bank 2017)
Population 44.27mn (World ranking 32, World Bank 2017)
Form of state Presidential republic
Head of government Mauricio Macri (president, centre-right), since 2015
Next elections 2019, presidential and legislative
  • Government commitment to correct imbalances
  • Developed industrial fabric
  • Skilled workforce compared to the region
  • Vulnerable to changes in agricultural prices
  • Macroeconomic imbalances and a weakened institutional framework
  • High inflation

2018: From riches to rags

Argentina came under the spotlight early May as Emerging Markets (EM) as a whole paid the price of higher US interest rates. The 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.

Yet the huge interest rate shock (interest rates from ~27% to ~60%), a bad crop harvest last year, tight fiscal consolidation, runaway inflation, less favorable financial conditions and heightened political uncertainty sank the country into severe recession last year after the economy grew +2.9% in 2017

Harsh recession on going

As expected, Argentina fell into recession in Q3, for the second time in three years. After dropping by -4.2% q/q in Q2, GDP contracted by -0.7% q/q in Q3. In y/y terms, GDP declined -3.5% in Q3. The contraction in private and government consumption, investment and imports accelerated. It was partially offset by the recovery in exports thanks to competitiveness gains after the -50% currency depreciation this year. Compared to Q3 2017, private consumption was the main drag on activity (-3.0pp) followed by investment (-2.3pp) as inflation averaged +35% in Q3 and policy interest rates spiked to 65%. From the supply side, retail suffered the most (-8.9% y/y), followed by manufacturing and agriculture. The economy should continue to contract as consumer confidence remains weak and inflation close to +50%. Two positive notes could slightly mitigate the contraction: policy rates have started to decline (currently around 60%) and the Q3 unemployment rate remained close to the level in Q1 (9.0%)

We estimate the contraction at -2.4% in 2018, and expect -1.5% in 2019, +2% in 2020. Internal demand will be a drag on growth, still due to high inflation (retail sales still in negative territory) and high interest rates; but it will be partly offset by recovering net exports due to the drop in imports and the trade deficit which turned into a surplus.  

Still slow rebalancing, and political risk remains

While still in recession, Argentina is gradually rebalancing. 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 pick up this year. Lastly, FX reserves are being managed more care­fully; they stand at USD66.5bn after the second IMF disbursement, i.e. USD20bn above last September’s trough.Financial needs for 2019 are covered with the IMF precautionary line, and reaching the primary fiscal balance should underpin debt sustainability.

However, inflation is still very high (+54.5% in February 2019). More efforts is needed on that front. We expect it to end 2019 at around +20%. Prospects for a Macri reelection in October remain likely but Peronist opposition needs to be monitored. Debt sustainability could be at risk if a the populist opposition wins as policy continuity and commitment to the IMF targets would not be granted.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Brazil 16%
1
25% Brazil
China 8%
2
19% China
United States 7%
3
13% United States
Vietnam 4%
4
5% Germany
Chile 4%
5
3% Mexico

Trade structure by product

(% of total)

Exports Rank Imports
Feedstuff for animals (excluding unmilled cereals) 19%
1
17% Road vehicles
Road vehicles 13%
2
7% Other industrial machinery and parts
Cereals and cereal preparations 9%
3
6% Telecommunication and sound recording apparatus
Fixed vegetable oils and fats, crude, refined or fractionated 8%
4
6% Electrical machinery, apparatus and appliances, n.e.s.
Oil seeds and oleaginous fruits 8%
5
6% Gas, natural and manufactured

The payment behavior of domestic companies is poor and the average DSO is excessive.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Procedural delays are common and costs are high. Considering the inability of domestic courts to cope with the caseload in a timely manner, commencing legal action without having first conducted pre-legal action is unwise.

For insolvent debtors debt renegotiation mechanisms have been put in place, however in practice, liquidation remains the default procedure even though it is never in the interest of unsecured debtors.

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Collection complexity Argentina

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Contact

Euler Hermes

Economic Research Team

research@eulerhermes.com

Georges Dib

Economist for Latin America, Spain and Portugal

georges.dib@eulerhermes.com 

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