Argentina’s Economic and Political Future Debated at EMTA Presentation
Argentina’s economic and political future was debated at a special EMTA event, “Argentina: Pros and Cons”, on Friday, November 5, 2010. The lunchtime event was held at the Global Financial Conference Center adjacent to EMTA offices in New York City and drew approximately 100 attendees.
EMTA’s Executive Director Michael Chamberlin welcomed attendees with a brief reviewof Argentina’s importance to the EM marketplace, despite its roller-coaster performance over the years. He noted that today’s presentation was another opportunity to look at Argentina from different points of view. While measuring Argentina’s capacity to pay was much more objective than measuring its willingness, Argentina’s willingness to pay was obviously linked to its capacity to pay.
Arturo Porzecanski, currently a Professor of International Economics and International Finance at American University, and previously a senior economist at several EM sell-side firms, delivered a paper on how the market should react to a potential new Argentine sovereign debt issue, as the country appears to be emerging from its sovereign default of 2001. for Porzecanski’s paper entitled “Should Argentina Be Welcomed Back?”.
In his remarks, Porzecanski noted that Argentina had been making progress towards a return to the capital markets “after being shunned for almost a decade” since its default. Recent issuances by provinces and municipalities appeared to augur a return to the markets by the sovereign (as addressed by Argentine Undersecretary Adrian Cosentino at EMTA’s Fall Forum, see related story).
“At first sight, it would appear that Argentina has come a long way from its troubled past,” he observed, detailing improvements in per capita income, unemployment numbers, export earnings and FX reserves. Financial ratios that are usually used to assess sovereign creditworthiness also seemed to have greatly improved. However, such apparent improvements in the Argentine financial condition mask reality, Porzecanski argued. “It would be naïve to rush to the conclusion that Argentina is a creditworthy or relatively safe place to invest,” he declared.
Porzecanski specified that the current and previous administrations have spent their revenue windfalls, leaving scant resources to support current or any potentially new public debt. In addition, the “accuracy and integrity” of official inflation data has long been questioned by investors, he reminded attendees. Not only have institutions been undermined by the government, but current fiscal, monetary and exchange-rate policies were in fact “unsound and destabilizing.”
Questions concerning the accuracy of official date underscore Argentina’s “lack of transparency.” The country is the only member of the G-20 which was not currently allowing the IMF to conduct an Article IV review. Furthermore, it is the only G-20 government in arrears to the Paris Club. Porzecanski warned that any eventual Paris Club restructuring would likely result in a haircut for current London Club debtholders, due to the Club’s “comparable treatment” principle.
Should Argentina be welcomed back to the international capital markets? “Despite the allure of high yields, investors are well-advised to approach Argentine fixed-income and equity investment and trading opportunities with extreme caution, because they embody substantial market and default risks” he concluded.
Following Porzecanski’s comments, Guillermo Mondino (Barclays Capital) moderated a panel discussion of Argentina’s prospects. “Was Argentina’s current situation, as a country neither headed for default nor investment grade, sustainable?” he asked.
Javier Kulesz of UBS investment Bank viewed this as ultimately a political question, “and politics in Argentina is very fluid.” Kulesz acknowledged that he was a strong advocate of the country’s economic fundamentals, noting “there is no reason Argentine spreads are 400-500 bps over Peru and Brazil…that additional risk is linked to politics.” He saw upside for Argentina if administrative and policy changes were made.
“There is no question that fundamentals are strong, but sustainability is open to question,” stated Patrick Esteruelas (Moody’s Investor Services). Esteruelas argued that Argentina is increasingly dependent on a favorable international economic climate. As for a potentially more market-friendly government, Esteruelas stressed that although the market seemed to be pricing in an increased possibility of political change, there were also other interpretations of the effect of President Kirchner’s death on the country’s future.
Hans Humes (Greylock Capital Management) viewed Argentina’s prospects in the medium- to long-term as now being “extraordinarily good.” Humes stated that much of the country’s previous bad behavior vis-à-vis investors was directly tied to the Kirchner presidency. Any domestic corporation that had been able to survive the “distorted economic policies” would be well-positioned going forward, he believed. Humes agreed that Argentina was undervalued compared to neighbor Brazil, although volatility was probably likely.
Kulesz agreed, noting that Argentina’s problems with Judec arbitrations, the IMF and the Paris Club could get fixed with great upside ”and that Argentina has the commodities that you want to export”.
Mondino asked speakers to debate a motion that opposition political parties secretly envied Kirchner’s policies and would do little to change the economic regime if the external environment remained favorable, growth remained at high levels, and inflation did not surpass 30%. Kulesz disagreed, arguing that a new administration would likely improve the accuracy of its official economic numbers, and would welcome the IMF in to conclude an Article IV review. He didn’t perceive Argentina as having “substantial default risk,” declaring that it was not in the same economic predicament it had faced earlier in the decade, nor that of Greece in 2010.
Esteruelas agreed that “the scale of the problem is not that great…it is not a Venezuela-sized problem.” Humes contrasted Buenos Aires’ confrontational approach during the first debt tender offer to its more recent tender, which “was handled much better with a different crew.” For Humes, most of the concerns expressed by Porzecanski would be addressed by any new administration.
Porzecanski pointed out that all EM boats were rising in an era of high commodity prices and investor search for yield. “What would happen when these tides stopped coming in?” he asked. The international environment would play a strong role in President Fernandez de Kirchner’s bid for re-election. In addition, any new administration would face potential social unrest if it tries to cut any subsidies.
Discussing Argentina’s ability to pay, Esteruelas noted that the average debt burden until 2012 was $14 billion, vs. $50 billion in FX reserves, which made debt service “highly manageable.” Kulesz opined that signs of willingness to pay were now “quite strong,” as was their current capacity.
The hold-out issue would continue, predicted Humes, although he speculated that the goal of major hold-outs was economic in nature, and not to establish legal precedent. “I am not sure what the price is” to clear the transaction, he added. Although governments generally paid off holdouts, Kulesz doubted the current government would write a check, especially for such a large amount, “…and this might take more than one new administration to address.”
With issues such as holdouts and ICSID judgments, was there rating upgrade potential for Argentina? Esteruelas commented that the higher rating that the country’s economic condition would normally support was being adversely affected because of the issues of weak institutions, Paris Club arrears, willingness to pay and concerns over manipulated government data. “A return of market confidence on the quality of official data is likely to weigh heavily on Argentina’s rating going forward.”