The new year that still does not provide enough signals to alter pessimistic expectations that weigh on the economy in general and financial valuations in particular.
The market thermometer still measures a high uncertainty about a debt arrangement with the Fund International Monetary Fund (IMF). In recent days, the Government gave an important indication about its will in agreement with the organism, from interest payments of the bonds made in the last time and the statements of officials who warned about the risks of not agreeing.
Dollar bonds recede amid disagreements with IMF over fiscal deficit target path
The Treasury paid between Friday and Monday the second coupon of the restructured bonds in September 2020, for a total amount of 693 million dollars. But the challenges for the short term are many, with next debt payments to the IMF in February, a month that will concentrate obligations for USD 1,100 million, while in March another 2,900 million dollars will mature.
The dollar bonds accumulate a 7.5% drop on average since January started. This fall, which equals prices with the March 2021 floor and barely reaches a notch above the minimum of December of last year, reflects the feeling that Argentina will go through the first quarter of the year with a strong currency drainage due to its debt, without liquid reserves and probably without immediate agreement with the IMF.
Beyond this vision, there is five warning lights related to the real economy behind the collapse of the price of government bonds.
1) Slow reduction of the fiscal deficit. The fiscal red is the “mother of imbalances”, which led Argentina to another lost decade in terms of economic growth, between 2012 and 2021. The path of slow deficit reduction public opinion raised by the Argentine government to the IMF supports the theory that repeat many of the mistakes of economic policy that dragged the domestic economy down a course of stagnation, indebtedness, inflation, high unemployment and poverty of 40 percent.
Paula gandara, Head Portfolio of Adcap Asset Manager, detailed that “Minister Guzmán admitted differences in the fiscal path with the IMF. Argentina proposed to reduce the primary deficit by 0.55% annually to achieve fiscal balance in 2027. However, he argued that the path proposed by the Fund would compromise the momentum of economic activity ”.
For Roberto Geretto, an economist at the Fundcorp fund, “the intention to achieve a fiscal balance only in 2027 is a bad sign for dollar bonds and it raises doubts regarding being able to reach an agreement with the IMF before March ”.
2) High inflation. A deficit that will take time to reduce comes from the resource of finance it with issuance monetary, which means high inflation for several years.
“With regard to the assistance of the BCRA to the Treasury, the decrease in this would take place gradually from the current 3.7% of GDP to 1.4% for 2022 and 2023, but he pointed out that it will be subject to the actual net financing received from the local market ”, recalled Paula Gándara.
3) Economic stagnation. The Argentine present reveals the difficulty of facing the maturity of sovereign debt and obtaining new financing to boost economic activity, given the impossibility of accessing the funds provided by the voluntary debt markets.
The risk country -collateral effect of depressed bond prices-, above 1,800 basis points, implies that the eventual issuance of new debt would require unfeasible and unpayable rates of 20% per year in dollars. Or put another way, bond prices have to rise enough for financing to return at reasonable rates, both for the public and private sectors.
“Given the lack of consensus and sufficient support – both internal and external – the chances of reaching an understanding to correct economic imbalances are reduced, and thus contribute to improving the confidence of economic agents, which is crucial to breaking the vicious cycle and for the agreement to act as a true driver”, Considered the economist Gustavo Ber.
4) Shortage of dollars. Although the Central Bank obtained an important balance in favor of its purchases of foreign currency in the wholesale market (more than USD 5,000 million in 2021), the reserves do not grow, because a large part of the dollars are used to pay a debt that cannot be refinanced.
Although Economía hinted that there would be a consensus with the agency regarding the rate of accumulation of international reserves, from 3,000 to 4,000 million dollars per year with the goal of reaching USD 70,000 million in 2030, the impression remains that export dollars they are not enough to cover both the need for imports and the debt payments.
Gustavo Ber stated that “a little over 60 days until 22-M (March 22), investors eagerly await updates on negotiations with the agency in order to reach against the clock at least one light agreement that allows the bulky maturities to be postponed”.
5) The possibility of default is not cleared. The difficulties to agree with the IMF, today the main creditor of the Argentine State and to which some USD 45,000 million is owed, have their correlation in the punished prices of the bonds.
This is because the multilateral body was always paid in a timely manner, even during the 2002 crisis, as a privileged creditor, while the various defaults always hurt private creditors. As is logical, if there is doubts about payments to the IMF, these are magnified as regards bondholders.
“We continue to think that a program with the IMF is possible. Disagreements over the fiscal deficit would not imply a breakdown in the negotiations. The same president (Alberto) Fernandez emphasized the difficulties that not agreeing with the institution would bring. In addition, in December the government paid the IMF about USD 1.9 billion and that’s a very strong indication that the Executive believes that a little earlier or a little later there will be an agreement ”, evaluated Paula Gándara.