The Big Idea

Argentina | Running out of options

| November 5, 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.

Argentina’s latest economic data look dismal with net foreign exchange reserves back near their worst historic levels, the blue-chip foreign exchange rate at a historic premium and tense rhetoric about the relationship with the International Monetary Fund. The good news is that Argentina honored its recent $389 million IMF payment. But the country’s cash flow stress should only worsen once the $4.3 billion IMF SDRS are depleted after the upcoming December payment of $1.89 billion to the IMF.

The Argentine representative to the IMF, Sergio Chodos, suggests that talks could extend beyond December. It’s a high-risk strategy to take a tough stance on IMF negotiations. Market sentiment will only fuel more USD demand. The market is expressing a vote of no confidence against failed Kirchnerismo policies and an urgent need for a coherent economic program. The informal deadline is much sooner than the hard deadline of March 22 from the Paris Club agreement for the intense cash flow stress. We have been warning since last summer about the difficulty of IMF negotiations for tough politics, worse economics, hard deadlines, and tight finances. The politics further complicate for the weaker political capital ahead of a potential electoral defeat and internal divisions within the coalition.

The cash flow stress is a clear reminder about the slim policy options for the Fernandez administration.  The December payment of $1.87 billion will nearly deplete the remaining IMS SDR cushion against an unrelenting schedule of $3.93 billion of IMF payments through the end of March.  The election-related stimulus and doubling down on policy heterodoxy only worsens the imbalance in USD supply and demand. Argentina is increasing its reliance on deficit monetization and increasing its reluctance to sterilize pesos from the domestic markets. The negative foreign exchange reserves only feeds into worse investor sentiment and flight into USD while also coinciding with seasonal year end USD demand. There is no other alternative other than to reach an IMF agreement quickly after elections.

The logistics are complicated. Sergio Chodos reminds us that is not just a technical agreement with the IMF staff (a highly technocratic and maybe less political IMF staff under the new leadership of WHD Director Goldfajn) but also a social discussion with Argentina’s congress.  The IMF board will not sign off on the program until there is political buy-in and approval from Argentina’s congress. This approval process could complicate if there is a breakaway from radical Kirchnerismo with potentially an unstable coalition after elections.  The controversy over loan surcharges also complicates with the Fernandez team seeking IMF concessions as a political win to secure domestic support.  The surcharge debate only distracts from the crux of the problem with a deterioration on the central bank balance sheet for the enormous stock of LELIQs. The interest payments have doubled from Jan-Oct 2020 into Jan-Oct 2021 and exceed central bank loans and FX profits as the largest contributor YTD to the monetary base.

The markets remain the enforcement mechanism. Our base case scenario has always been for a political compromise of an IMF program post elections. The recent policy announcements to attract USD inflows look almost desperate at an advance phase of cashflow stress with regulations and market interventionism less effective.  This is not a sustainable strategy over the next 2 years.   The headline risk could accelerate over the next few months as defeated politicians may resort to desperate tactics and cashflow stress worsens.  However, politics should soon be subordinated to the economics with the election cycle the catalyst and the markets the enforcement mechanism.  The worse the market stress the higher the optionality for a moderate policy shift.  Argentina prices in low to mid 30s are sensitive to higher positive convexity as the intensity of the domestic stress forces policy moderation. We reaffirm our preference for higher current yield of the Buenos’37A since carry remains an important component of total returns that equally benefits from any positive convexity as a spread product to the sovereign.

Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles