Argentina’s risks still rising

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One of the more remarkable facets of Euromoney’s country risk survey is the trend deterioration in Argentina’s country risk score, taking it from being a promising emerging market (EM) in the region to a pariah that is almost equivalent to Venezuela’s dismal record.

The country has plunged 62 places in a decade and is anchored in the lowest of five categories of risk containing the world’s most unsafe investor domains.

In the latest survey, Argentina’s score was marked down along with its global risk ranking. It is now rated 160th out of 174 countries and is sandwiched between Myanmar and Laos on similar gradings.

A litany of political, economic and structural risks mar Argentina’s profile and remain a concern to investors praying for future debt repayments to be honoured.

Take the economy. GDP is recovering from the pandemic and is forecast to rebound by 7.7% in real terms this year, but this follows three years of decline, including a 9.9% drop in 2020.

Consumer prices rose by 40% year-on-year in 2020, but with the annual inflation rate climbing to as high as 52.5% this September. These are official estimates. Using alternative, purchasing power parity calculations would undoubtedly put the figure even higher.

Added to that, Argentina’s sovereign debt ratio rose to 102% of GDP, with the budget deficit widening to 8.5% of GDP.

For a bondholder, an agreement between Argentina and the IMF will be excellent news 

 - German Plessen, Bahía Blanca Stock Exchange

Euromoney survey contributor German Plessen, an adviser at the Bahía Blanca Stock Exchange, says Argentina is growing without solid foundations, without domestic and international credit, with huge inflation-rate restrictions on access to foreign exchange and capital flows.

“This generates multiple foreign-exchange rates, with a range of more than 100% between the official and the capital market’s implicit rates,” he adds.

The economy will improve, temporarily, but fundamentally it is worsening, creating formidable challenges for 2022.

Under these conditions, says Plessen, it is difficult to imagine the economy moving at the pace the government needs to stay in office beyond 2023. Therefore, it is likely that between the elections on November 14 and the end of the year, there will be some economic policy measures to affect voting intentions of different segments of the population.

The delayed legislative elections are for half of the seats in the chamber of deputies and a third in the senate.

The primaries saw a big surge in support for the opposition on a record low turnout and proved a setback for president Alberto Fernández and his ruling Frente de Todos coalition, although the polls are inconclusive about whether this will be replicated or the government will claw some credibility back.

Much will depend on the turnout and the extent of tactical voting, though the key is how the government will react.

Plessen says it is unknown if the government will lean towards greater intervention of economic sectors and a deepening of relative price distortions, or if it will go for a more orthodox scheme, including an agreement with the IMF, easing of restrictions on capital movements and a raising of the exchange rate.

He states that Argentina is an important member of the IMF, due to its history, its size among emerging member countries, and the amount of debt it maintains with the organization.

The relationship with the IMF is also important for Argentina, because it represents the way in which the country is institutionally related to the rest of the world, which is why it is not politically profitable in Argentina to be indefinitely in conflict with the IMF.

“Argentina needs to agree on a new payment scheme, and the IMF needs that scheme to be supported by a consistent plan that includes realistic growth targets, inflation reduction, fiscal consolidation and external accounts in line with the new financial commitments with international creditors,” says Plessen.

“Putting out a consistent plan is precisely what this government has been postponing and now needs to do to reach an agreement. Ultimately, the important thing is not to reach an agreement, but rather that that agreement is fulfilled, since it will imply economic growth and ability to pay.”

He concludes: “For a bondholder, an agreement between Argentina and the IMF will be excellent news.”

Still, Argentina’s risks will continue to rise until an agreement with the IMF is achieved, inflation begins to fall and the government starts to ease restrictions on capital flows.