The future is always uncertain but it seems particularly true for Argentina. As elsewhere, it is unclear how the COVID-19 epidemic will pan out, but Argentina’s proximity to Brazil, a country of 210 million people where contagions seem out of control, poses risks that few other countries have to face.
COVID-19 headlines have crowded out news of the prolonged spell of dry weather and of the locust swarms that are crossing the country. The size of the coming harvests, which are crucial for the Argentine economy, are more at risk than in previous years. And bountiful harvests are sorely needed to compensate for the likely weakness of Brazil’s economy, which is by far Argentina’s largest economic partner.
Last there is the open question of Argentina’s default on its foreign-currency debt and its restructuring. Negotiations between the government and bondholders are still ongoing and although the distance between the two seems quite small by now, the theatrics are far from over, which makes it quite hard to fathom which solution will be agreed upon.
There is no doubt that Argentina has done a better job than Brazil, Chile and Peru at controlling the COVID-19 pandemic. Unlike his Brazilian counterpart, President Fernández swiftly decreed key measures to prevent a rapid growth in infections: as early as March 20 Argentina closed its borders and imposed a nationwide lockdown. The president had gained the support of the mayor of Buenos Aires and of other members of the opposition, and this meant that the measures could be presented as bipartisan, raising the level of compliance (and boosting Fernández’s popularity). By early May, the government decided a gradual reopening of all districts, except for Buenos Aires’ metropolitan area, that continued to be a hotspot. By the end of June there were about 62,000 confirmed COVID-19 infections in the country, new daily cases were close to 2,300 and the death toll was slightly below 1,300. The densely populated Buenos Aires province was still a world of its own, with new infections uncomfortably high, so the authorities have decided to extent the lockdown measures in the district until July 17. Unfortunately, as in many other emerging economies, the poorest swathes of the population – especially in urban areas – find it hardest to respect social distancing, shelter-in-place and other basic hygienic measures required to contain contagions.
To help the country through the lockdown and the health emergency the government announced measures totaling about 5 percent of GDP. The focus has been on increasing health spending, on providing income support for workers, vulnerable groups and hard-hit sectors, and on sustaining aggregate demand with spending on public works. Several measures have been aimed at encouraging bank lending, particularly to micro, small and medium enterprises.
The flip side of these health policy actions is significant damage to the country’s economy. It’s still too early to gauge the economic cost of the pandemic, given, on one hand, that it is not over yet, and, on the other, that it will depend on how neighboring economies fare – Brazil in particular – as well as the rest of the world. The IMF currently estimates that Argentina’s GDP will shrink by 9.9 percent in 2020, 4.2 percentage points worse than projected in April. As for 2021 the Fund forecasts just a mild recovery, with GDP rising by +3.9 percent year-on-year (World Economic Outlook Update, June 2020). The IMF concluded that the forecasts it had made in April were too optimistic given that the lockdown is lasting longer, global demand is much weaker, commodity prices are lower, consumer confidence is depressed by the dragging of the debt-restructuring negotiations, and the government has limited fiscal space to sustain the economy.
Unfortunately, the pandemic hit Argentina at the worst of times, weakened as it was by a long period of recession and high inflation. Capital controls already in place have meant that capital outflows immediately before and during the pandemic have been contained and the exchange rate has depreciated less than in previous periods of economic difficulty. In August 2019 the government had introduced a broad set of restrictions on capital movements, specifically on financial transactions (limits on the purchases and transfers of foreign currency as well as on debt servicing in foreign currency), and on some current account transactions (the requirement to surrender export proceeds, restrictions on the import of services, and on the international transfer of dividend payments).
To top all this, in May 2020 Argentina defaulted on its sovereign debt for a ninth time in its history. Throughout these months the government has been negotiating with bondholders on a restructuring plan for its foreign debt (about US$ 65 billion). The government has “sweetened” its proposal twice, but creditor groups keep holding back, asking for more. President Fernández has repeatedly stated that the country is willing to pay but that it lacks the resources to do so: reducing the cost of the debt is a necessary condition. The government’s initial offer included a three-year grace period on all debt payments, a 62 per cent cut in interest and a 5.4 per cent reduction of its face value. The offer was promptly rejected by bondholders; two more months of negotiations followed, after which the government proposed to cut the grace period to only one year, to increase the interest payment, introducing a coupon linked to exports, and to reduce the face value haircut to 3 per cent. The new government proposal has a net present value’s recovery of 50 cents on the dollar, while bondholder creditors aim to recover at least 55 cents. The difference between the two sides seems tiny but negotiations have stalled again and the government extended the deadline for bondholders to accept its improved offer to July 24. A deal is needed in order to avert a long standoff, something the government is understandably keen to avoid. The IMF, which provides technical assistance to the Argentine authorities and performs the debt sustainability analysis of the various debt-restructuring proposals, indicated that the government has very little spare room: paying out more to private creditors would put at risk its future capacity to service and pay back the debt.
The extra time given to bondholders in order to assess the government’s latest proposal will actually give both parties the chance to better assess this very complicated situation, hopefully leading both to a wiser decision.