Fears are mounting that Argentina is heading for a financing crunch following its downgrade from B+ to B by Standard & Poor’s this week, despite news of a debt buy-back programme for the sovereign.
"Inflation and fiscal and financial strain have increased, while the likelihood of the government taking prompt corrective measures to staunch the loss of creditworthiness remains low," said S&P analyst Sebastian Briozzo on Monday.
And yesterday (Thursday) Moody’s cut the outlook on its B3 rating of Argentina from positive to stable, citing "political volatility and contentiousness" in the country. However, the rating agency said that it was unlikely to downgrade the country in the short term.
Although Argentina is projected to have a primary surplus of 3% of GDP this year, analysts maintain that the country’s volatile economic policy mix and external vulnerabilities will substantially erode its fiscal account over the next three years.
High food prices, public sector wage rises, price controls, and fiscal expansion have fuelled annual inflation. It is officially 9.1%, but S&P said that according to "private estimates" it could be 24%-28%.
The government has been accused of manipulating inflation data, rather than addressing unstable prices through monetary and fiscal policy. This was demonstrated by a walkout by staff at national statistics agency Indec last year.
This year, economic management under the country’s embattled president, Cristina Fernández, has also been widely criticised domestically and by foreign investors. Last month, the president lost much political capital after the senate dismissed her proposed increase in an export tax on soybeans in light of seething domestic discontent and crippling farmers strikes. Labour unions, core supporters of the administration, are demanding higher wages to compensate for higher energy prices. The tax would have raised $1.2bn.
The country’s risk premium could rise further as government revenues are vulnerable to a fall in agricultural commodity prices and the construction industry contracted by 8.8% from May to June — its worst performance in four years. Analysts expect a sharp slowdown in GDP this year, to just 2.5% compared to a projected expansion of 6.5%.
Global backdrop
The market has been quick to respond to Argentina’s deteriorating financial position against the global backdrop of declining commodity prices. By the end of last week, the yield on its 8.28% 2033 dollar bonds had swelled 141bp.
In an attempt to arrest the sharp fall in the price of Argentine fixed income assets and to shore up market confidence, the government also announced on Monday a buy-back plan for public debt in both dollars and pesos that have heavy payments due over the coming 18 months. Local press reported that dollar-denominated Boden 2012s and 2013s, and Bonar X bonds will be targeted along with Boden 2008s and 2011 in pesos.
However, any gains in secondary prices were soon wiped out by S&P’s downgrade later in the day.
Deutsche Bank estimated that up to $1bn could be spent in the operation, saving the government a potential 25% in debt servicing costs. But Deutsche’s chief emerging markets economist, Gustavo Canonero, argued that this move does not signal a changing economic policy course.
"This decision reached by the government seems simply a reaction to reduce uncertainty about capacity and willingness to pay," he said.
To finance Fernández’s populist spending programme, the country relies heavily on domestic borrowing and it has in recent years formed a financial alliance with Venezuela.
In May, Venezuela bought $1.36bn of Argentine US-dollar denominated Boden 2015 bonds, with an implied yield of 15%. This in effect completed Argentina’s financing requirements for 2008 and brought the Andean nation’s total purchase of Argentine bonds to $7bn.
Some analysts say the buy-back announced this week is a tacit recognition that this dependence upon Venezuelan creditors has its limits.
Furthermore, Argentina’s debt costs are scheduled to increase markedly in 2009, with total principal and interest payments set to climb from $14.6bn this year to $18.2bn next year and $17.7bn in 2010, according to the government’s 2008 financing report.
Rising debt costs, slowing growth, unrestrained inflation, and economic mismanagement have created an unnerving backdrop for local market financing, while international capital-raising options are limited.
This is because of a dispute with holders of about $20bn of the country’s defaulted debt, after they turned down the government’s 2005 restructuring offer of 30 cents on the dollar. In addition, the Paris Club, a group of the world’s 19 richest nations, is seeking repayment of $6.3bn.
"While debt financing is OK over the next two years, if the administration continues this policy direction we could see a default on current debt in 2010 or 2011," warned one Latin American debt capital markets banker. "Combine this to the defaulted debt in 2005 and Argentina could be sleepwalking into becoming Latin America’s pariah."