Argentina’s recent return to international capital markets has been enthusiastically greeted by investors and politicians alike. The $16.5bn bond issue – a mere fraction of the $70bn notional demand its announcement generated – represents the biggest ever sale from an emerging-market economy, a coup for new, pro-business president Mauricio Macri and a shot in the arm for Argentina as it begins to push on after decades of underwhelming economic performance.
Enthusiasm for all things Argentinian has been aided by the news that the proceeds from the bond sale will go towards paying holdout creditors from Argentina’s 2001 debt default, initially to the tune of $9bn.
Once branded “vultures” by the combative Kirchner government – whose refusal to negotiate with creditors lead to a further default in 2014 – the rapprochement with creditors and the fervour for Argentina’s bonds is a vote of confidence in the Macri government – in particular Finance Minister Alfonso Prat-Gay – to provide a steady hand on the tiller over the next 4 years.
Compare and contrast with any point in the last 15 years of Argentine economic history.
The crisis of December 2001 was a marked low-point in 3 consecutive years of economic depression, with the default on $93bn of Argentine sovereign debt leading inexorably to the annus horribilis of 2002 and its 11% plunge in GDP and a doubling of the national poverty rate.
The process of recovery from the disastrous early 00s has been hamstrung, in large part, by the financial and reputational damage caused by the overhanging debt repayment negotiations. The inability to bury the grim legacy of 2001 has barred the country’s access to international money markets, stifling internal economic development
Likewise, Argentina’s status as an international financial pariah has spilled over into its diplomatic affairs. The unseemly dispute in New York courts with a consortium of creditors led by US hedge fund Elliott Management, mushroomed on more than one occasion into ructions between the Casa Rosada and the White House, former president Cristina Fernández de Kirchner going so far as to accuse Washington of plotting coups against her.
Taking office at the end of 2015, Mauricio Macri faces nothing as extreme as the December 2001 crisis that saw 4 Presidents come and go in a month, nor is his negotiating stance as pugnacious and counterproductive as that of his predecessor.
However, his task is to make good the gains of recent months and in this regard, the success of the bond issue could hardly be timelier.
At present, Mr Macri and Mr Prat-Gay are staring down the barrel of a fiscal deficit running at 7% of GDP, the largest Argentina has faced in 30 years. The ability to tap international money markets will provide a useful temporary expedient while the president and his team fight to achieve their ambitious target to cut it to 1% by the end of his term in 2019. This is unlikely to be an easy task as significant cuts to public expenditure will undoubtedly be met with disapproval from the public at large and entrenched opposition in a congress in which his Cambiemos coalition has no overall control.
(Similarly, the Macri government’s aim to slice a minimum 5% off rampant inflation by the end of 2016 has sparked pleas for patience from the Argentinian Central Bank. While the target may be aspirational, the move does at least represent an attempt to tackle the problem head-on, in contrast to the Kirchner government which adopted “Ostrich Tactics” and cooked the books at national statistics agency INDEC from 2007 onwards.)
Whether it is formal government policy or not, reports suggest that significant contractions in spending are already underway at several Argentinian government departments.
At this stage in the budgetary year, the average department would be expected to have used up 30% of its allocated financial resources. Yet spending levels in several areas – most obviously at the Ministry of the Interior, Public Works & Homes – are as low as a fifth of that figure, leading some observers to wonder if the Macri government’s hard-and-fast approach to spending cuts might have a depressive short-term effect on economic growth, particularly if the axe falls on key areas of social investment and infrastructure.
The gap in infrastructure has long been seen as key inhibitor to development in Argentina. Above all, the lack of an effective power generation and distribution network has been a bête noire for several years, with the country experiencing an energy deficit since 2011.
The Kirchner government sought to remedy this problem by expropriating the assets of Spanish oil firm Repsol, citing underinvestment as its chief motivator. By contrast, Mr Macri seems to be taking a less rapacious approach, keen to lure back the foreign investment put to flight by the actions of the previous administration in order develop the estimated 23 billion barrels of unconventional oil and gas reserves of the Vaca Muerta field.
However, hopes that the private sector will take up the slack in energy infrastructure have been struck by a double blow.
Just as choppy conditions in the global oil industry have led many oil firms to rein in investment – especially in high-cost, low-margin shale projects like Vaca Muerta – so Mr Macri has been forced to face down an opposition bill to declare a labour emergency.
Currently negotiating its way through the Lower Chamber, the bill aims to double compensation for all public and private sector workers made redundant between now and the end of 2017 and reinstate any workers laid off since March.
Not only is the proposed law a direct challenge to the new president’s authority, more importantly it has the potential to frighten the horses among the international investors upon whom Mr Macri had staked his hopes of Argentine economic development.
Perhaps in reaction to these events, the government has attempted a volte-face in recent weeks, distancing itself from private sector development of the nation’s hydrocarbon resources and instead announcing a package of state-sponsored investment in renewable energy, totalling $5bn by 2018.
Inevitably, some will see this as evidence of reality checking the ambitions of an overzealous new leader, while others will view it as the actions of an adaptive and responsive government. How Mr Macri’s policies evolve over the next 4 years remains to be seen, though it seems likely that his more hard-line policies on public finances and inflation will be tempered by political expediency and economic circumstance.
However, what can be said of the opening months of the Macri administration is that it has brought together elements rarely seen in recent Argentinian history: openness to the world – last month saw President Obama drop in for a tango – and faith in the ability of the government to meet its obligations.