The country is battling Covid, and buying time, with elections on the horizon.
A woman dressed as former Argentina's first lady Eva Peron attends a demonstration outside the International Monetary Fund headquarters earlier this year. Photo: Reuters
The risks to investors in Latin America remain heightened, with economic growth prospects subdued by the pandemic and some countries facing elections.
This has been reflected in Euromoney’s country risk survey, with only a few countries in the region improving this year.
These risks are highlighted by Argentina’s travails, a country that should be a far safer option in view of its democratic underpinnings and enormous potential, but which continues to drag its heels, offering investors little comfort in the wake of a history of creditor defaults.
Argentina is languishing in tier five, the highest risk category in Euromoney’s categorizations, on a total risk score that has fallen sharply on a five- and 10-year trend basis.
Ranking 152nd out of 174 countries in Euromoney’s global risk table, on a score of less than 28 out of a possible 100 points, the country is considered a similar risk to Iraq and Liberia, according to risk metrics calculated from Euromoney’s crowd-sourcing survey.
Only Venezuela (165th) is below Argentina in the survey’s rankings among Latin America’s 19 sovereign borrowers, which count Chile (24th) and Uruguay (29th) as the safest options.
Steve Hanke is one of Euromoney’s survey contributors, with expertise in Argentina’s failings.
A professor of applied economics at the Johns Hopkins University in Baltimore and a senior fellow and director of the Troubled Currencies Project at the Cato Institute, he calculates his own inflation and misery index for Argentina, anddescribes the peso as a junk currency.
“It has depreciated by 53% since January 1, 2020,” he says. “Only five countries’ currencies [Venezuela, Zimbabwe, Lebanon, Sudan and Syria] have depreciated by more than Argentina’s.”
His warning, further espoused in an article he posted last year, is that “speculators who wish to engage in peso-denominated assets must have a massive appetite for risk taking”.
Most of the survey contributors are not overly concerned by speculation of economic and institutional collapse in Argentina.
The country has enough financing to make its principal and interest payments to the IMF due later this year, totalling $4.6 billion and “it is demonstrating a willingness to reach a sustainable agreement to solve the debt schedule”, says survey contributor Jose Miguel Infantozzi, regional investment manager at TodoCalculado.
“However, with no access to international debt markets, solving Argentina’s unsustainable debt problem is a basic pillar in the process of restoring economic stability,” he adds, and that means agreeing on a new financing programme with the IMF.
There is at least some breathing space.
The country can count on $4.4 billion-worth of pandemic funds, while foreign-exchange earnings are benefiting from higher commodity prices for soybean, with Argentina one of the world’s biggest exporters of the soft commodity.
Increasing exports is one of the pillars to ensure sustained economic growth, notes Infantozzi.
“New investments in the most dynamic sectors – such as mining, energy, manufacturing and the automotive industry – are being considered as potential projects that could increase export volumes and attract foreign investments,” he says.
When it comes to Argentina, the IMF appears to be totally incompetent and has been repeatedly taken for a ride- Steve Hanke, Johns Hopkins University
Last year, a deal was agreed with private creditors restructuring $65 billion-worth of loans, and this week it was announced that an agreement has been reached avoiding default on $2.4 billion of debts owed to the Paris Club of lenders due at the end of next month.
Argentina has agreed to pay $430 million in two instalments, and it has until March to resolve the outstanding balance. It has also agreed to treat all creditors equally, with no favours to China.
Yet the country also owes $18 billion to the IMF next year, requiring another debt rescheduling, pending a credible programme of economic targets and reforms – read fiscal austerity – to tackle a problem the government does not seem to want to burden voters with.
Its prospects of success are rather slim, according to Johns Hopkins’ Hanke.
“The IMF’s conditionality has been unenforceable, as all IMF conditionality agreements in Argentina are,” he says.
“Argentina is one of the IMF’s biggest, most important recidivists. Since joining the IMF in 1956, it has called in the IMF’s firemen 22 times. When it comes to Argentina, the IMF appears to be totally incompetent and has been repeatedly taken for a ride. If history is a guide, Argentina will take the IMF for a ride again.”
German Plessen, an adviser at the Bahía Blanca Stock Exchange, finds it difficult to foresee any agreements being struck with the IMF and Paris Club before the mid-term legislative elections in November, when half the seats in the Chamber of Deputies and a third of those in the Senate are renewed.
“After 18 months in office, the Fernández government can be defined as highly interventionist and with an agenda where the priorities of international investors have little relevance,” he says.
“Until then, the government will try to postpone all the definitions related to the financial agenda, and it will seek to highlight that – despite being one of the most affected countries in the region – the health system faced the pandemic without collapsing.”
The country is still coping with Covid-19, of course. It has seen two waves this year, one peaking in April and another, larger one in late May/early June, and it may not be over yet.
The rise in cases and slow vaccine rollout have led to temporary lockdowns, perpetuating a crisis that has now seen the economy shrink for three consecutive years, including a 10% pandemic hit to real GDP in 2020 alone.
The unemployment rate is around 11%, officially, but with invariably many more under-employed. Borrowing rates are sky-high and the unofficial exchange rate has taken a pounding, with capital controls incentivizing dollarization.
Due to the low base, and idle capacity, GDP will naturally bounce back. In real terms, it rose by 2.4% year-on-year in the first quarter of this year.
The OECD is predicting 6.1% real-terms growth for the year as a whole, but it is seen slowing to 1.8% in 2022, with GDP remaining below its already depressed pre-pandemic level, domestic demand constrained by pandemic restrictions and high inflation due to fiscal deficit monetization.
Plessen says the growth outlook “is not good” beyond the pandemic, with inflation, international financing uncertainty and institutional instability – tariffs, taxes and trade restrictions – cited as negatively affecting local and foreign investors.
The fiscal deficit is a big problem. It was 6.5% of GDP in 2020, according to the ministry of economy, or 8.5% of GDP, according to a wider definition, and it perpetuates inflation.
Hanke calculates his own measure of inflation for Argentina that indicates it is running at around 36% on an annual basis and is endemic.
Using the quantity theory of money and the equation of exchange, Hanke has calculated the golden growth rate (GGR) for Argentina. This is the growth rate of broad money (M3) that would allow the Central Bank of Argentina to hit its current inflation target of 5% per year.
“The GGR for Argentina is between 5% to 10%, but the money supply (M3) continues to grow uncontrollably at 52% year-over-year, a rate that’s between five to 10 times higher than the rate that would allow the central bank to hit its inflation target,” he says.
Hanke also calculates an annual misery index. In 2020, Argentina was the seventh most miserable country in the world, behind only Venezuela, Zimbabwe, Sudan, Lebanon, Suriname and Libya.
Investors in Argentina certainly know what misery is, but it is not as if they have not been warned. The country is, after all, an extreme risk.