Previous Quarterly Editions
Expropriation Risk: 53 60 57 63 Political Violence Risk: 67 66 66 67 Terrorism Risk: 34 34 34 35 Exchange Transfer and Trade Sanction Risk: 67 68 69 72 Sovereign Default Risk: 58 67 70 72
TREND ▲ OUTLOOK ▲
It was always going to be challenging for President Alberto Fernández, who only took office in December 2019, to cope with the intertwined challenges of resolving the country’s debt crisis and coping with the impact of COVID-19. However, the past few months have proved an even more difficult test than many expected. In April 2020, just before missing a 503-million-USD interest payment, the government announced a restructuring proposal for debt totalling 66 billion USD. This included a three-year moratorium on repayment to allow the economy to rebound from COVID-19 and an average haircut of 62% on interest payments (equivalent to 37.9 billion USD) and 5.4% on capital (3.6 billion USD). As expected, the proposal was quickly rejected by the main bondholders but negotiations then continued over both the length of the moratorium and the extent of the haircut, with deadlines extended as the sides edged closer amid mutual suspicion. Several of the key bondholders are less concerned about the impact of the pandemic on the Argentine economy but more concerned about the the return of former president Cristina Fernández de Kirchner (CFK) to government (now vice president) as they blame her for the state of the country’s economy. An improved government offer in June 2020 kept talks alive and the government remains hopeful that it can split what has so far been a solid creditor block and begin to do deals with individual bondholders. In early July 2020, the Fernández government made another ‘final’ offer involving just a one-year moratorium and 53.5 USD per 100 USD of nominal value for bonds issued during the 2015-19 presidency of Mauricio Macri, and 59.5 USD for bonds issued in 2005 and 2010 under the Kirchner governments. The offer, with an August 2020 deadline, is a further attempt to divide creditors and may gain wide enough acceptance to succeed. The G20 and the IMF have both expressed support for this offer, not least because it commands widespread political support within Argentina and they are urging creditors to accept. Some smaller ones have already done so, although the government's ability to begin payments in 2021 is in doubt. Meanwhile, the struggle with COVID-19 has continued, with the cost of the pandemic making settlement of the bond restructuring issue increasingly urgent. Argentina, which has had one of the longest lockdown periods in the world, is looking at an economic contraction of 12% this year, with economic activity falling by a record 26.4% year-on-year in April 2020, the first full month of lockdown. Although lockdown restrictions have eased in some parts of the country, permitting some return to economic activity, the subsequent spike in COVID-19 cases in the metropolitan area of Buenos Aires (AMBA) forced the return to strict lockdown in July 2020 with the closure of some 70,000 businesses. As AMBA accounts for 40% of the country’s economic activity, this will further set back the prospects for recovery. There is little sign of flattening, with the country recording 120,000 cases by mid-July 2020 as its daily tally reached new highs, but the government still hopes to implement a substantial reopening programme during August 2020. Seeking to prevent a spike in unemployment, the government banned new layoffs for a 60-day period at the beginning of April 2020 while initiating two main relief programmes with a combined cost equivalent to 2.6% of GDP to cover salary payment and provide household assistance to some nine million people.
TREND ▲ OUTLOOK ▼
In early June 2020, President Fernández announced that the government would take control of Vicentin, the country’s sixth agricultural exporter by size but mainly the handler of soya oil and flour exports. The company had declared bankruptcy in February 2020 after defaulting on 1.3 billion dollars of debt. In practice, 80% of the company was already held by state banks, and the government intended to have the National Agricultural Technology Institute assume management. The owners called the takeover premature and many critics detected a political motive in the move, seeing it as an attempt to distract supporters of CFK, whose allies were heavily involved in the expropriation plan, from the concessions being made in the bond restructuring talks. Argentine share prices fell by some 8% the day after the move was announced and by the end of the month the government had stepped back from expropriation, arguing that its only aim was to keep the business afloat and ensure that state-owned Banco de la Nación, its largest creditor, could recover its debt. The outcome has been a setback for the Fernández government, alarming investors while angering the CFK wing of the president’s support base.
TREND ▲ OUTLOOK ►
Argentina’s Independence Day on July 9 2020 saw anti-government demonstrations in Buenos Aires, Córdoba and some 70 cities across the country. Protesters complained about the continuing lockdown restrictions, as well as expressing their views on the government’s vacillating approach to control troubled cereals exporter Vicentin. Earlier cross-party support for the government's anti-coronavirus measures has fractured, and Fernández's hopes of sustaining a moderate discourse appear increasingly illusory as political polarisation and economic angst mount.
The murder of CFK's former secretary Fabian Gutierrez, a prosecution witness in a key corruption case against the vice president, shocked the country. Conspiracy theories quickly appeared even though the motive for the killing appears more likely to have been theft than anything political. However, the murder of Gutierrez has underlined again the extent to which the lack of personal security remains a central concern across the country. While there has been no major terrorist attack in Buenos Aires since 1994, 14 people were arrested in November 2018 after two homemade bombs exploded in the capital.
The central bank has cut interest rates eight times since President Fernández took office in December 2019, with the rate down to 38% in March 2020. The initial cuts were linked to falling inflation but softening the impact of the virus is now the priority. The government has few options for maintaining social welfare subsidies or sustaining even minimal economic stimulus measures, apart from continuing to increase the money supply at a time when inflation remains above 50%. The peso fell to a historic new low of more than 65 to the dollar (USD) just before the government unveiled its first set of debt restructuring proposals and will remain vulnerable while negotiations continue. As its foreign reserves dwindle, the central bank has been limiting access to US dollars in recent weeks.
Central bank reserves fell by three billion USD during the first half of 2020 to42.6 billion USD, having lost a billion USD in May 2020 alone. This is almost half the 80 billion USD in reserves at the start of 2019, and largely the result of central bank spending to defend the peso. With gross debt approaching 90% of GDP, the fall in reserves is another reason why a debt restructuring deal is pressing.
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