Market Considering Argentina Without Macri, But Not Without The IMF

It is hard to imagine a more delicate situation in Argentina than this. The next president holds the biggest International Monetary Fund loan in the fund’s history. Defaulting on it would literally close Argentina for business, and surely from international lenders. Debt is rising. The economy is shrinking yet again this year with maybe a blip on the heart monitor in 2020.

Investors are starting to consider life without Mauricio Macri, the Buenos Aires businessman who vowed to save Argentina from Kerchnerismo only to later usher in the return of the International Monetary Fund, the most hated institution in the Americas, if not the world.

With an election year upon us, investors in Argentina’s high yielding bond market are looking at who might replace President Macri if it’s not Cristina Kirchner herself. It’s a close call. But one thing is certain, no matter who wins, the IMF stays. If Cristina wins and kicks them out in a default, Argentina’s economy slips back into a recession in 2020. For now, the IMF is forecasting growth next year, and contraction this year.

The current voters are divided between roughly a third pro-Macri, another third pro-Cristina, and the rest wanting a fresh face.

See: Macri’s Theme Song: Definitely Cry For Me, Argentina — Forbes

There are many potential candidates out of the Macri-Cristina box, including Maria Eugenia Vidal from Macri’s Cambiemos party. Vidal is the governor of Buenos Aires province. She has not stated an interest to run, however.

Among the Peronist parties, they all seem to cannibalize each other with former presidential candidate Sergio Massa the most popular. And his popularity rating sits at around 23%.

There has been a lot of noise lately on the emergence of former Economy Minister Roberto Lavagna as the potential compromise candidate.  He has a favorable rating of around 49% against and a negative rating of 35%, which practically makes him a shoo-in.

“It’s too soon to worry about whether he’s a genuine threat since he would need to consolidate support among a competitive pool of candidates and convince everyone that he’s not only the best moderate Peronist candidate but also a better option than Cristina,” says Siobhan Morden, managing director of Nomura Securities. “The moderate Peronists are not a worst case alternative (to Macri) since most would accept the economic reality of an IMF program,” she says.

Argentina Peso About To Get Weaker

BNP Paribas expects the Argentina peso to start slipping considerably as election uncertainties come to the forefront in the months ahead.  No growth in the economy this year, coupled with nearly 25% real interest rates make the central government debt unsustainable.

“We were bearish in the fourth quarter of 2017 against consensus and we see the current situation reminiscent of 2018. We maintain our bearish outlook,” says Gabriel Gersztein, global head of emerging markets strategy for BNP Paribas in Sao Paulo, Brazil. “Consider buying protection in Argentina,” he says about investors hedging their bets against the peso.

Argentina is surviving on IMF life support. In the first half of the year, it owes lenders $45 billion. Of this total, $19.6 billion accounts for intra-public sector liabilities. There’s no rollover risk with the domestic public entities, the exponential rollover cost makes debt payments untenable.

According to BNP, Argentina’s public debt needs in 2020, Macri’s second term or a new president’s first is as low as $50 billion and as high as $98 billion between then and 2023.

Whoever is president in 2020 will have to deal this record-breaking IMF package, a package that is roughly 20 times larger than the $3 billion IMF loan defaulted on in 2003 when Nestor Kirchner became president.

Argentina will have to slash government somehow without cutting into social services need for those crushed by a two-year-old recession. They will also have to cut interest rates. Luckily they have room to do so. But because faith in the peso is so low, there is a decline in peso credit. Companies are not taking out loans, surely not in pesos.

Credit demand contracted 15% in real terms year over year. The economy contracted nearly 3% last year and is expected to contract by around 2% again this year.

There are also high and unsustainable tax pressures on the economy, equal to about 42% of GDP, and a debt load equal to 95% of GDP as of September 2018.  Some 79% of that is in dollars.

“I wouldn’t be bullish on Argentina,” says Fernando Pertini, partner and CIO of Milennia Costa Rica, a private wealth manager. “This is not about the return of Cristina. This is about the failure of Macri’s economic policies. Economic activity is almost dead and inflation is not even near to be defeated,” he says.

Many people see the Argentina crisis as Kirchner’s fault. She also used the downturn as a way to capture voters, making millions dependent on her Justicialist Party to make ends meet. Macri took a lot of those subsidies away, making him less popular. In dire times like these, people want those protections back. That may not be enough to usher in Cristina’s return to power.

An alternative candidate to both Macri and Cristina would face the challenge of convincing the electorate that the government is basically broke. It cannot afford what it once did, on borrowed money and a phony peso valuation.

All of this suggests policy uncertainty until round two of the elections ends on November 24.

The peso is susceptible to election-related headlines and Argentina investors re-evaluating Macri’s chances.

“The government’s stubbornness of managing inflation through ultra high interest rates stopped the peso from weakening, but this is not sustainable,” Pertini says. “The incredible part of this story is that Macri has a real chance of winning. Whether he wins or loses, Argentina will need to restructure its short-term debt.”