EMTA Special Seminar: Argentina's Outlook (London) - Oct. 23

What Went Wrong Discussed at EMTA Argentina Seminar in London

Speakers at EMTA’s Special Seminar on Argentina, held in London on October 23, 2018, discussed the country’s most recent fall from grace and offered views on the road ahead. The event attracted 100 market participants, and was sponsored by the TPCG Group.

Moderator Diego Portela (TPCG Group) reminded the audience that it hadn’t been long since former Finance Secretary Caputo had declared that Argentina would lead the Emerging Markets for the next twenty years. Portela questioned speakers what had gone wrong, and why investors had lost confidence in Argentina.

Alberto Bernal (XP Securities) listed several contributing factors—externalities such as US rate hikes, which deterred capital flows to EM countries, as well as “self-inflicted wounds” by the Macri “dream team.” Inflation-targeting in a country with 30% inflation was a poor decision, he stated, leaving the country much more vulnerable to being perceived as missing targets. Instead, Buenos Aires should have initially focused on restricting the monetary base.

Aberdeen Standard Investment’s Edwin Gutierrez argued that the market was guilty of being “enablers” and bore at least partial responsibility for the Argentine mess. “We had given them the benefit of the doubt because this was the All-Star team; we had allowed them to fundamentally misread the tea leaves.” As a case in point, he noted that the market had ignored the fact that the much-heralded massive FDI inflows had failed to materialize. Once the market turned, Argentina’s decision to enter an IMF agreement was the appropriate action, and switching gears to focus on zero monetary growth was the right policy needed to shock the economy, according to Gutierrez.

BlueBay Asset Management’s Graham Stock believed that the country’s revised fiscal and monetary policies “both have a good chance to succeed.” He expressed hope that, thus far, “the social antagonisms” which could erode progress on the fiscal front “seem to be minimalized.” While also emphasizing the clear rules that limit BCRA intervention, he concluded that, “short-term, these new policies are working, and they are the right prescriptions for the situation that Argentina finds itself in now.”

Todd Martinez (Fitch Ratings) commented that the loss of market access may eventually force Argentina to a sounder footing by incentivizing a faster pace of policy adjustments. His base scenario was constructive through 2019. Martinez reasoned that the moderate political opposition has an incentive to avoid any disruptive actions, as it would prefer to inherit an economically healthier country should it win the next election.

Sponsorship of Argentina credit remained an issue for external debt, in Bernal’s view. “For many, “Argentina is a trade, not an investment.” Yet on the positive side, the IMF program could continually be rolled over, if the IMF and Buenos Aires maintain a working agreement, and the size of the deal was more than sufficient to keep the country afloat.

“The problem is that Argentina has been a ‘trade’ for everyone—dedicated EM and others—and it has been a consensus wrong,” declared Gutierrez who characterized the country as a “debt-aholic.” He warned that Argentina was likely to return to the markets relatively soon, though to issue new debt (excluding rollovers) before the 2019 elections would be “suicidal.”

Stock believed that union wage negotiations would be important to monitor; “if they can keep raises to what is expected, that would be a big plus.” With recent improvements in inflation, and a rebound of the peso, there is reason for short-term optimism, in his view. A medium-term outlook would have to be based on the next elections, “which at this stage is hard to call because the social cost of the new government programs is not clear.” Longer-term, the country has significant structural challenges, including the need for labor and market reforms and a tension between the central government and the provinces, a situation that “lends itself to populism.”

Portela asked if any deviation from the IMF progam would be tolerated. Martinez predicted no IMF flexibility with the agreement’s fiscal targets, while the zero-monetary growth policy had clear rules and would be easy to monitor. However, there were, in his analysis, some areas where the IMF could exercise discretion, depending on evolving conditions.

Addressing political risk, Gutierrez acknowledged that the possibility that President Macri would not win re-election is a “major market concern.” He predicted greater volatility as the 2019 vote drew closer. Stock wouldn’t rule out a return of a populist administration in the next “five to ten years.” Bernal predicted that a loss by Macri would prove devastating to the country. “One of the positive things that the President has done is to tell the people the truth—you cannot give away utilities for free, for example.” Bernal commented that the poor soy harvest of 2018 was unlikely to be repeated, and a more successful crop in 2019 could bolster Macri’s chances.

Martinez concurred that the re-election of Macri was the best thing for the economy, while arguing that on a long-term basis, a victory by moderate Peronists who subsequently maintained similar economic policies would put the country on sounder long-term footing. Gutierrez seconded the importance of “institutionalization” of new policy directions, rather than having to rely on specific leaders.

Several panelists acknowledged the potential appeal of local debt. “On paper it is very compelling—high yields, and a currency biased to strengthen; but the lack of liquidity means there is no exit if something happens,” summarized Stock. While his firm had no view on individual instruments, Martinez concurred with assessments that the undervaluation of the peso was not likely to continue.

Dollarization remained a final option should the situation deteriorate, according to speakers. Stock foresaw it as “inevitable, if all the other plans don’t work.” Bernal noted that halting monetary expansion was a draconian measure and, were it not to succeed, dollarization would have to be put on the table.

Fitch Ratings, MarketAxess and XP Securities provided additional support for the event.