In just a few weeks, Argentina has gone from a plucky country on the long road to economic recovery to a pariah in global markets.
The country had been steadily attempting to improve its difficult economic situation under Mauricio Macri over the last few years, but shock election results on August 11 saw a rise in support for opposition challenger Alberto Fernández, and his vice-president, and former populist president Cristina Fernández de Kirchner.
The August vote result spooked investors — the peso plunged 36% against the dollar, the Argentine stock market has halved in value, and investors have fled government bonds, sending yields spiking.
This week, the country imposed currency controls, deepening concerns about Argentina’s economy amid a terrible month. That brought back painful memories of 2001 when Argentina defaulted on $93 billion of sovereign debt, the largest on record.
Even before the capital controls, Goldman Sachs warned that its outlook for the country was turning more bearish.
In a note dated August 30, analysts led by Tiago Severo said they see “a longer and deeper recession amidst higher inflation” — saying Argentina’s economic slump was likely to be the longest since the country’s disastrous default in 2001.
Goldman expects Argentina’s GDP to contract by 3.2% this year and by another 1.6% in 2020, “totaling three consecutive years of recession.” The bank also sees inflation declining at a slower pace, “reaching 50% by end-2019 and tracking above 40% during the first half of 2020, with risks skewed to the upside.”
Investors are worried. The cost of insuring bond debt against default in Argentina has boomed to 3600 basis points — 360% — on a five-year credit default swap, an insurance product designed to protect bond holders, an increase of 93%. The implied probability of default is now 92%, which could have a major impact on global investors.
S&P also indicated that the country was now in selective default despite Argentina’s $57 billion loan agreement with the IMF, which was the fund’s largest outlay to date when agreed a year ago.
“Things in Argentina are likely will get worse, even with IMF support, and the country will struggle to access to international markets,” according to Andres Abadia, senior international economist at Pantheon Macroeconomics.
“They are not measures for a normal country”
Any further deterioration will likely cause any remaining investors to flee as Argentina desperately tries to restore order. The IMF announced it would provide an additional $5.4 billion to the country while currency controls have been reimposed in an attempt to stem the fall in the Peso’s value. Inflation is flashing red at 22% for the first half of the year.
The central bank has spent nearly $1 billion in reserves since Wednesday, according to Reuters.
“Increased political and policy uncertainty and the large dislocation of broad financial conditions will likely weigh on the economic outlook, almost certainly reversing the tentative stabilization of activity and the somewhat more palpable decline in inflation observed in recent months,” said Goldman Sachs analysts.
The Argentine government has hiked short term interest rates to almost 80% and has moved to unilaterally reclassify the maturities of its short term debts, in a move which will undoubtedly cause concerns among investors.
Economic minister Hernan Lacunza called the measures “uncomfortable” but indicated that without them there would be serious consequences. “They are not measures for a normal country,” he said, according to Reuters, citing a radio interview Sunday night.
Even with continued international support, the Argentine economy is walking a tightrope. The country’s sovereign default in 2001 still lingers in the minds of investors with the stark possibility of a new populist government coming to power in October, only amplifying concerns.
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