“It’s like chemotherapy. If you have it all at once, you are going to kill the patient. You need to find a dose that won’t kill the patient.”
The patient being discussed by a senior capital markets banker in New York is the Argentine economy. The dispute that still rages domestically and internationally is about president Mauricio Macri’s medicine. How large should the dose of adjustment be? And just how quickly should the government implement its reforms?
Many abroad and in Argentina are in a favour of upping the speed at which the medicine is administered, especially in light of Macri’s success in last October’s mid-term elections.
“I think Macri needs to stop the gradualism policy,” says Exotix’s Rafael Elias. “It got him through the mid-terms and he [still] has a very high popularity rating. But the country is spending more than it is making and the debt is growing exponentially.”
To keep the adjustment moving forward at a viable tempo, the government needs to keep growth above 3%. That needs real investment, both local capex and foreign direct investment, rather than large capital flows that heat up the exchange rate and have been the financial feature to date.
“From Macri’s point of view, FDI has been sluggish, and they need to get GDP to above 3%,” says Elias. “This will be a massive year.”
Roberto Sifon, head of the Americas’ sovereign team at S&P Global, says: “To use a soccer analogy: we are headed into the last minute and Argentina needs to score a goal. That goal is 3%-plus growth. So they really need to start seeing some real domestic investment.”
And, although nobody is saying that international investors are about to stop funding Argentina, the performance of the sovereign’s debt at the beginning of this year has been notable. The bonds came under pressure in January, when Argentina was one of the few emerging market sovereigns to see its spreads widen (and remember, Argentina is still classed as a frontier economy because of its structural risks).
The $9 billion of issuance on January 4 certainly played a part, creating technical concerns as it came with large new issues concessions that repriced the existing curve wider (estimated to have been 10 basis points for the five-year, 25bp for the 10-year and 20bp for the 30-year tranche). Underwriters say that the overhang has now been cleared and no further large deals are to be expected this year. But with slow progress on the development of the local markets, 2019 should see similar issuance levels.
Then, when volatility hit the international debt markets in mid February, the bonds continued to underperform. The country’s spread widening accelerated. This dynamic was the result of investors being overweight the credit and, according to bankers, investors realizing the structural advances of recent years were largely priced in.
“The room for positive surprises has diminished and the ‘beta’ to the market has increased again, suggesting that in a large market movement, Argentina bonds would underperform,” a report by Citi summarizes.
The large price movement is also, in part, investor reaction to monetary policy, after a change to the inflation-targeting regime and a couple of cuts to the base rate, despite high inflationary pressures in the economy, led many to question the government’s commitment to this fight.
In early March there was further bad news. The 2017 GDP growth number was announced and it came in lower than the psychologically important 3% barrier. This lowers the statistical carry-over from 2017 to 2018’s growth, which is already being forecast lower because of a combination of the expected impact of a drought on agricultural production and the negative effect of higher inflation expectations on consumption.
JPMorgan sliced 10bp off its forecast for 2018’s GDP growth due to the lower carry-over, as well as 25bp for the drought and a further 10bp for the negative impact of inflation. The bank now predicts GDP growth of 2.8% in 2018, down from 3.3% (below that 3% barrier again), as well as increasing its forecasts for inflation. Other banks have also lowered GDP and raised inflation forecasts (not great for a government about to enter into sensitive negotiations for 2018 pay increases). Capital Economics is more bearish: “Economic growth in Argentina appears to have peaked,” it says.
For the full article visit Euromoney Latin America