Argentina | Tense IMF relations

Siobhan Morden | February 12, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

It’s all about the International Monetary Fund. Argentina is in dire need of a boost to confidence, and bondholders are still waiting for a coherent economic program. The normalization of IMF relations is critical not only for postponing onerous bilateral and multilateral payments but also for alleviating overall balance-of-payments stress. The recent economic data are discouraging with inflation at 4% month-over-month, economic stagnation and a slower accumulation of foreign exchange reserves. Add some ideology to the mix. It is a recipe for staying underweight.

The ideological pressures are escalating with political preference for interventionism and foreign exchange or price controls ahead of the October midterm elections. This is what creates somewhat of a stalemate on IMF negotiations with official rhetoric suggesting delays perhaps beyond the May target deadline and increasing risk that an IMF agreement is postponed until after the October elections.  This suggests a more precarious muddling through and reaffirms an underweight recommendation. Remember that zero-coupon Eurobonds do not allow for carry returns in a muddling through scenario, with total returns depending on the upside/downside of credit risk.  The elections pose a major constraint against policy pragmatism and orthodoxy while the weak policy framework perpetuates balance of payments stress.

Eurobonds should continue to show a high correlation with foreign exchange reserves for the simple explanation that an accumulation in USD assets is necessary for onerous future USD debt liabilities.  The early optimism and December price gains on Argentina Eurobonds have since stagnated with the stagnation of foreign exchange reserves. We have been focused for months on IMF relations as the binary catalyst for bond performance.  The latest official rhetoric reaffirms our concerns for delays on IMF talks and validates our underweight recommendation.  IMF Western Hemisphere Chief Werner qualified the May timeframe as ambitious while local headlines suggest a 60-day grace period on the $2.4 billion end-of-May Paris Club payments may provide some breathing room. There is goodwill on both sides to avoid a default to bilateral or official creditors. The ongoing negotiations and flexibility with YPF bondholders show the forced pragmatism of managing tense creditor relations.

However, austerity measures and price and foreign exchange flexibility are inopportune with the slow economic recovery and October midterm elections.  Minister Guzman insists on adjusting tariffs to align with an official 30% inflation target and prevent an increase in the 1.7% of GDP estimated subsidy burden. This may face pushback from within Kirchnerismo with heavy political influence on a set of economic policy managers that want to avoid any inflationary shocks. The election cycles show high voter sensitivity to both inflation and foreign exchange weakness, and next month’s initial target for tariff adjustments looks inconvenient ahead of October elections.  Meanwhile, there is no margin for fiscal deterioration when the budgeted 4.5% of GDP primary fiscal deficit target is already above a reasonable 3% to 3.5% of GDP range that would coincide with a better growth and inflation tradeoff.

The options then come down to sourcing intermittent funds to remain current on Paris Club and IMF obligations while postponing talks until after elections.  However, there are scarce if any obvious sources with liquid net foreign exchange reserves at new worst levels of -$2 billion on February 7. Perhaps the seasonal agrodollars and tighter foreign exchange controls will allow for a small cushion for foreign exchange reserve accumulation over the next six months.  The size of the official creditor payments is not overly onerous at $2.4 billion to the Paris Club end May and cumulative $2.5 billion to the IMF through the end of September. The timing for IMF negotiations post elections would be ideal heading into a mature phase of cyclical recovery and an unwind of pandemic- or election-related stimulus with fiscal targets that would more easily coincide with the IMF.  However, foreign exchange and price misalignments would accumulate with another lost year of economic stagnation and balance of payments stress. The gross foreign exchange reserves at $39 billion will be no closer to the $64 billion estimate of the DSA metrics in 2024 necessary for the beginning of delayed USD debt payments.  There are only a few years to gradually accumulate foreign exchange reserves in the absence of a positive external shock and under the constraint of economic policies that discourage USD inflows and encourage USD outflows. If there are no major setbacks in the midterm elections, then there is no break with Kirchnerismo. The muddling through status quo on policy management suggests continued slow accumulation of foreign exchange reserves and still uncertain future debt repayment that validates the current high yields. Meanwhile, the near-term IMF delays may also push bond prices to the lower end of the 4-month to 5-month trading range.