ARGENTINA

Fiscal and monetary measures will help cushion the blow but not avoid the recession. On the monetary side, the Central Bank of Argentina has targeted money supply in a way to almost halve the policy interest rate, which stood at 63% in December 2019. Other measures have been implemented to enhance bank lending, such as lower reserve requirements for bank lending and regulations that limit bank’s holdings of central bank paper to provide room for SME lending (IMF). Although it will have positive consequences on domestic activity, this additional liquidity could lead to more pressure on the currency. The government has intended to reduce the country’s high inflation through price controls (on food and medical supplies) and lower indexation. However, increasing monetization of fiscal deficits by the central bank could actually push up inflation above the already high 50% level, which risks putting the country in a hyperinflationary loop. On the exchange rate side, measures aimed at restricting financial and current account transactions implemented since August 2019 have helped in limiting capital outflows, which have been considerable in other emerging economies during the Covid-19 crisis.

Fiscal relief measures amount to around 5% of GDP and have focused on providing increased health spending, support for workers and vulnerable groups, support for hard hit sectors, demand support, forbearance and credit guarantees. Although relatively limited compared to other countries, this additional fiscal stimulus is a long shot, given the country’s likely future difficulty to issue debt due to financial markets searching for safe assets and current debt restructuring.

Beyond debt restructuring, the challenge is restore trust through a credible and sustainable policy strategy

A year after being put on an IMF drip (USD57bn program) and starting to rebalance, the resurgence of political risk in October 2019 with President Macri’s severe election defeat triggered new market sanctions. Argentina’s main vulnerability is its high public debt-to-GDP ratio (93.3% 2019 and close to 100% 2020). At end-2019, Argentina’s public debt totaled USD332bn, including loans from the IMF (USD44bn) and private bond-holders (USD148bn). In addition, the fact that most of the public debt is denominated in USD is an additional vulnerability (around USD200bn), especially debt issued under foreign law. Due to these vulnerabilities, the Argentinian government was in “technical default” since August 2019 (asked for a re-profiling i.e. it delayed payments) and eventually ended up defaulting in May 2020. Meanwhile, Argentina has been in talks with bond-holders and other creditors to restructure about USD100bn in debt, among which USD66bn is held by private creditors and governed by international law, while USD50bn is governed by local law. After it defaulted in May 2020, Argentina's government reached a new deal with creditors over the restructuring of around USD65bn in debt, allowing the country to move on from its ninth sovereign default. Extended maturities on the debt and lowered interest rate payments (from 7% on average to 3%) will definitely ease Argentina debt difficulties even though the bonds' value fell at the end of September 2020.

However, Argentina is not out of the debt woods just yet. The Argentine authorities also engaged talks with the IMF to review the current program under the standby arrangement (SBA) and renegotiate the USD44bn debt with the IMF. Despite more lenient IMF authorities – emphasizing the need to protect the poorest from fiscal austerity – the governmental policy platform seems incompatible with probable restructuring conditions i.e. spending cuts and labor and pension reform. Thus, until a new agreement is reached, Argentina’s dollar bonds are expected to remain under pressure. In fact, investors seem to be pricing a difficult post-Covid recovery and deteriorating public accounts and do not seem convinced by the government strategy, which could focus on promoting agribusiness, energy and mining exports, pursuing import substitution and hiking taxes. The failure of such strategy to boost growth and balance fiscal accounts could lead to renewed debt stress in the medium-term.