More of the same?
Argentina’s sovereign bonds are currently indicating that the country is on track to implode in the medium term. They are trading at 30 cents on the dollar, with an implied interest rate of more than 20 percent and what is known as an “inverted yield curve,” meaning longer duration bonds offer lower rates than shorter ones. The country risk premium, or the “riesgo país,” surged to the mighty figure of 1,647 this week, indicating its differential over rates being paid by safe haven US Treasuries, while the implied probability of default over the next decade stood at 95 percent.
All of these negative indicators have shot up over recent days, in great part due to pressure by institutional investors — local and international — deciding to dump their holdings of Argentine government debt, in many cases at a loss, due to a loss in confidence over the future of the country. One of the catalysts appears to be President Alberto Fernández’s fiery speech to the Legislative Assembly as he inaugurated the legislative year, taking a page from Vice-president Cristina Fernández de Kirchner’s book by appealing to a radicalisation of his agenda. There are now serious doubts that an agreement with the International Monetary Fund will be reached by May, as Economy Minister Martín Guzmán had suggested previously, which in turn leads the market to price in continued money printing and excess spending in order to guarantee victory in October’s midterm elections.
Yet, the economy is rebounding strongly, with certain sectors like construction and auto manufacturing shooting on all cylinders. According to the latest data from the INDEC national statistics bureau, the construction activity index was up 23.3 percent year on year, while car manufacturing had jumped 13.2 percent in the same time period to January. The exchange rate markets have remained calm throughout all of 2021, with the blue chip rate at its lowest level since last September, while its spread over the official exchange rate has fallen below 50 percent — this still indicates high levels of stress, yet it continues to move in the right direction. According to different projections, from the OECD to BBVA, Argentina could grow between 4.5 and 6 percent this year, while some analysts are even more bullish. Inflation remains extremely high, but analysts have already begun to lower their estimates from the 60s to the lower 40s, even 30s. International commodity prices are on the rise, meaning soybeans and other agricultural commodities are at multi-year highs, which, together with strict currency controls and the potential of IMF disbursement through special drawing rights, indicate the country should be able to avoid an unexpected devaluation.
The connecting element between these two, apparently contradictory stories has to do with trust. President Fernández’s radicalisation, touched upon last week, and his alignment with the political objectives of his coalition’s “largest shareholder,” Mrs. Fernández de Kirchner, has spooked the market. Alberto, picked for his flexibility and alliance weaving, appears to be closing in on the Kirchnerite hardcore base as a strategy to win this year’s midterm elections. Deciding to take arms against the Judiciary, the IMF, and the opposition indicates he is once again going to play the game of “la grieta,” the deep polarisation that characterised Cristina Fernández de Kirchner and Mauricio Macri’s times in office.
Throughout his presidency, time and time again, Fernández has proven that his speciality skill appears to be telling everyone what they want to hear. If, therefore, the speech before Congress is read purely in electoral terms, then it is possible to imagine that the market’s pricing of a “pivot toward Venezuela” is mistaken. Indeed, market analysts suggest the current selloff in Argentine bonds has overshot reasonable prices, suggesting there is a long-term opportunity in Argentine paper. Hard to believe, but as Argenfunds Asset Management director Alejandro Kowalczuk observes, rates should be closer to 12 percent than 23. “In the recent past projections assumed a fantastic Argentina, while today they suggest a nation without future and an incoming devastating economic, social, and political contraction. I don’t believe Argentina is on track to becoming Switzerland, but it’s also not about to become Venezuela. Whether we like it or not, it is and will continue to be Argentina,” the analyst told the Cronista economic daily.
The kick-off of the electoral campaign in our country promises to be brutal for future expectations. Government and opposition will duke it out, using all of the usual dirty tricks. The Fernández-fernández administration is playing hardball, slowing down the peso-dollar devaluation in order to pull the reins on inflation, while using price controls and the long arm of the state to keep a lid on prices. While Guzmán has tried to lay down his vision, suggesting deficit control is not a rightist policy, he is losing the battle to the hardliners. Postponing an agreement with the IMF until after the elections is even being considered by the Fund itself, allowing Cristina to rant against its constructed enemy, and hit back at Macri and the opposition. Ultimately, more of the same we are used to, if we take a step back.
The kick-off of the electoral campaign promises to be brutal for future expectations.