End could be in sight to Argentina’s rising risks

It has been hard to make a case for Argentina in 2020, with the government struggling to handle a litany of problems worsened by the healthcare crisis.

Restrictive measures to stop the coronavirus spreading and the downturn in global trade dealt massive blows to the economy, alongside a loss of faith in the peso draining FX reserves, resulting in the implementation of exchange controls.

With the central bank also resorting to printing money, there is even now hardly a case for a sustainable fall in inflation.

As of mid-December, more than 1,500,000 Argentinians had tested positive for Covid-19, with more than 41,000 deaths among a population of almost 45 million. Unemployment and poverty rates have been rising alarmingly.

After two years of recession, reflected in downgraded economic risk indicators, GDP is predicted to fall in real terms by 12.9% in 2020, according to forecasts released in December by the OECD.

Gross fixed capital formation (investment spending) has been declining at an accelerating pace in recent years and is on course to contract by almost 30%.

Coupled with the downturn in private consumption, now slowly reversing, this has led to imports plunging more than exports, correcting the current-account deficit. An already uncomfortable fiscal deficit has ballooned to an estimated 11.4% of GDP.

The government has already endured a sovereign debt default – the country’s ninth – in May, with foreign-exchange reserves depleted, and while massive debt restructurings have deferred payments well into the future, there is still the risk of another default with borrowing costs elevated.

No wonder the country has been assessed as an increasing risk by analysts contributing to Euromoney’s crowd-sourcing global risk survey in 2020.

Argentina’s score has been consistently downgraded, with no let-up in Q4, according to preliminary results from the current survey round due to be released early in the new year.

It means Argentina’s score has fallen more than most other countries worldwide in 2020, bracketing it with Lebanon, Liberia, Mali, Niger and Yemen, all showing similar negative trends.

It also leaves Argentina firmly within tier five, the lowest category containing the highest default risks. At 144th out of 174 countries in Euromoney’s global risk rankings, it is the second-worst investor option in the region – only Venezuela is a riskier bet – falling 25 places during the year.

All of Argentina’s economic risk indicators have been marked down, as well as all of the political risks, to varying degrees, most notably the score for government non-payments/non-repatriation, highlighting its debt problems.

The pressure on healthcare resources has lowered the structural risk score for soft infrastructure, and Argentina’s capital access score is also downgraded.

Survey contributor Roberto Cervelló Royo, associate professor at the Universidad Politécnica de Valencia, succinctly sums up the country’s plight with a cautious message for investors.

“Argentina is struggling with financial difficulties, country default and debt restructuring, while its economy is still contracting,” he says.

“Furthermore, Argentina has been hard hit in terms of Covid-19 cases and deaths on the one hand, and the rise of unemployment on the other, and despite the efforts of the government controlling the currency, inflation and political uncertainty still prevail.”

Indeed inflation, although falling for most of the year, is still officially at 35.8% – as of November – and despite tight currency controls to shore up the peso, there are fears that inflation will only become worse in 2021 thanks to the increased money supply to finance wage rises and other means of Covid-related support.

“Latin America as a region was hard hit by the pandemic, with Argentina being particularly affected as the pandemic highlighted existing weaknesses,” says survey contributor Ann Modica, associate director of AM Best.

“The economy was already in a recession prior to the outbreak, and the pandemic has exacerbated an already bleak economic outlook for 2020.”

She adds: “We expect a contraction in GDP of approximately 11% due to significant weakness in the export sector, and muted domestic demand. Higher levels of inflation, hovering around 40%, and a volatile currency – despite government intervention to support the peso – has weakened consumer confidence and purchasing power.

“Additionally, high levels of unemployment have muted household spending, and while the government has provided support to the economy to help buffer against the negative impact from the pandemic, it has done so at the expense of higher levels of debt.”

The political risks are underlined by a fractious ruling coalition, with senators from the Peronist bloc sending a scathing letter to the IMF in November, despite the government still negotiating over a much-needed financing programme.

While Argentina would benefit from a new financing arrangement that sets out a more manageable debt repayment schedule, there will be considerable opposition to the reforms the IMF will demand in return.

“Significant political pressures have made renegotiations of the IMF’s $44 billion loan repayment difficult,” says Modica. “With some politicians demanding that no conditions, such as pension reform, be attached to the new programme, negotiations with the IMF continue to be ongoing and will likely last until at least the first quarter of next year.

“The fund will likely demand some form of austerity measures, which will be politically unpopular and have the potential to trigger mass protests.”

Yet the outlook is brighter than it was when the Covid crisis first erupted, these issues notwithstanding, as Modica concurs by stating: “Economy minister Martín Guzmán has shown some signs of agreeing with more traditional reforms to secure a deal.

“A deal with the IMF would be another important step to restore investor confidence and stability, after the country had to restructure over $100 billion in foreign-currency sovereign bonds with private creditors earlier this year,” she adds.

Moreover, real GDP growth of around 3% to 4% is pencilled in for 2021, with consumption and manufacturing picking up. Plus, the news on the global vaccine development is also providing hope for a better year ahead, however long it takes to complete the mass programme.

Germán Plessen, an adviser for the Bahía Blanca Stock Exchange, is one contributor who also takes a more holistic view of country risk, offering a positive slant on certain aspects of Argentina’s risk profile.

Although he stresses that Argentina is not currently a country that he would recommend to foreign investors – citing regulatory instability, capital flow restrictions, unbearable tax pressure, inflation and FX volatility – he does score some factors above average.

On the economic-GNP outlook indicator, for example, he fully factors in the fact Argentina is on course for growth next year after the steep contraction in 2020, and on corruption he rates Argentina better than Brazil and Paraguay.

As for government stability, he says “the current administration which took office a year ago has passed several laws in Congress during 2020, including the debt restructuring law and the 2021 annual budget among others, and the opposition is divided”, adding that he does not see any notable risk of instability.

Moreover, on factors such as information access/transparency, he points out the national statistics bureau (INDEC), ministry of economy, central bank and the IMF all provide online access to updated information.