Argentina: No Such Thing as a Free Lunch

Argentina. Image courtesy of

​Fifteen years is a long time for a country's economy. Markets may soar and crash. Commodities fluctuate between dirt-cheap and hyper-expensive. The job market expands and shrinks. A lot can happen, which means it will.
But Argentina’s case is unique.  A decade and a half without access to global financial markets might seem endless.
In the latest country report dedicated to Argentina, Euler Hermes upgraded its risk rating to C4 (from D4) in anticipation of a settlement of its long-lasting dispute with the holdout creditors.
When the country issued bonds for the first time in years on April 18, it was met with overwhelming enthusiasm.  Ironically, the unprecedented demand for made-in-Argentina debt was the first step in the long and winding road back to normalcy.
An initial offering of USD15 billion swelled to a sale worth USD16.5 billion.  It was the largest bond sale in emerging-market history.
But why and how has this happened? How could a country whose previous president called creditors ‘vultures’ become the darling of traders?
The numbers tell some of the story: the offering was four times oversubscribed for all maturities with an average interest rate of 7.1%. The ten-year yield of 7.5% is markedly below that for Brazil, currently around 13%. Part of the new debt was used to pay back USD9.4bn to hedge funds suing Argentina, and put an end to a legal battle that  prevented the country from paying bondholders, and pushed it into default in 2014.
The crucial point to be made is that all this reflects and affects investor confidence. The tide has turned ever since Mauricio Macri won the presidential run-off at the end of 2015 and has begun to steer the country’s economy in a new direction.

No longer staring at the abyss
Argentina has stepped back from the edge. Yet now its leadership faces a hard and dangerous journey until it can safely say that the economy is back on track. Whatever reforms Macri and his government manage to implement – from eased capital controls to more credible national statistics – there will be a toll to pay.
Indeed, 2016 will be a year of adjustment, with recession expected at -1.3% according to our forecasts, inflation above 40% and another sharp depreciation of the Argentinian Peso. The main challenge will be to find enough hard currency to meet external commitments without depleting foreign reserves too much. Enhancing agro-competitiveness, reviving the ailing manufacturing sector and sanitizing the financial sector are among the important milestones to meet for a full recovery.
A tough year ahead? Perhaps. But there could be a hefty reward at the other side of the pain.
Euler Hermes forecasts that the current account deficit will narrow this year to -USD9 billion, (from -USD14 billion, in 2014), driven by the first trade surplus in years (2016 forecast: USD6 billion). Imports will collapse on the back of the ARS depreciation and sluggish private consumption.
And still, external commitments will skyrocket, totaling above USD50 billion. This staggering sum will include payments to all the holdout debtors and importers. The Argentine government has already secured some USD21 billion, or 40% of external commitments, thanks to an international banking loan and the successful bond issuance.
The country also expects USD20 billion in foreign investment inflows, accounting for another two fifths of commitments. If this happens, Central Bank’s foreign reserves (at USD25 billion today) will suffice to cover the remaining USD11 billion.

The next steps 
In other words,  everything will hinge on the capacity to attract foreign investors and reassure markets about the very future of the country. After the auspicious offering the country should be able to whet enough foreign investors’ appetite. When they will be back for the long haul, so will Argentina.
In the meantime, households and companies may be in for a rough ride. Updating business practices and restoring incentives for the real economy will require splitting hairs, especially after years of disruptive announcements for the business climate.

Ludovic Subran

Chief Economist

Euler Hermes

If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages.