Argentina Special August 2020

Argentina

Argentina: Argentina strikes deal with creditors, setting stage for crucial negotiations with IMF

August 6, 2020

On 4 August, the Argentinian government reached an agreement with its biggest creditors to restructure around USD 65 billion in foreign debt. If accepted by enough bondholders by the new deadline set at 24 August—which is likely—the deal will give a financial shot in the arm to the crisis-stricken country and allow Argentina to avert default, setting the stage for subsequent negotiations with the IMF over a loan arrangement struck by the previous administration in 2018. However, daunting economic challenges remain.

The government convinced creditors by accelerating some payment dates and adjusting legal aspects regarding collective action clauses. The new recovery value is estimated at 55 cents on the dollar, up from the 40 cents initially offered by the government. The deal will potentially reduce the country’s risk premia, which should also translate into some normalization of credit extension domestically. That said, although the deal could avoid years of exclusion from capital markets, it most likely will not translate into a significant inflow of capital in the short term, as macroeconomic and fiscal woes persist. Therefore, fiscal stimulus will probably be financed by expanding the monetary base, with clear implications for inflation.

Access to international capital markets could instead come from upcoming renegotiations with the IMF over the USD 57 billion loan deal struck in 2018. In order to postpone payments coming due in 2021-2023, the IMF could ask the Argentinian government to draft a plan to strengthen macroeconomic fundamentals, stabilize the economy and improve fiscal accounts. This would reassure investors over the medium- to long-term sustainability of government finances and the economy, and make them more willing to consider investment opportunities in the country.

A revamped IMF deal is vital, as the economic situation in the country remains critical. The coronavirus crisis is pushing the economy deeper into a recession that is now heading into its third year. Moreover, Argentina has one of the world’s highest inflation rates, and sustained monetary financing since the start of the pandemic will keep price pressures elevated ahead. Additionally, capital controls, which have led to an overvalued official exchange rate, are seemingly further discouraging investment decisions.

Commenting on the deal, Diego W. Pereira, vice president and executive director at JPMorgan, stated:

“A successful debt restructuring outcome is a necessary but not sufficient condition to stabilize the macro. Regaining international market access to finance future growth and repay debt requires the implementation of a consistent medium-term macroeconomic program to tackle the main macroeconomic challenges. If so, the country would be able to regain pre-2018 sudden stop activity levels quicker, taking advantage of the ample slack present in the economy.”

FocusEconomics analysts see the economy remaining in recession this year, contracting 11.0%, down 2.2 percentage points from the previous month’s forecast. In 2021, analysts see GDP finally rebounding—albeit thanks in part to an extremely favorable base effect—with growth coming in at 5.2%.


Author: Massimo Bassetti, Senior Economist

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