President Alberto Fernández’s government has reached a deal with creditors to restructure a US$66-billion debt following months of wrangling, but analysts say that won't be enough to solve the country's economic woes.
Argentina is now expected to focus on renegotiating the repayments of its US$44-billion loan from the International Monetary Fund, as well as other multi-billion dollar debts.
Fernández celebrated Tuesday's "impossible" resolution, achieved despite the added financial pressure imposed by the coronavirus pandemic, saying the "horizon is clear" for the government to reach further agreements. But analysts are not convinced that the country is in the clear.
"It takes the pressure off, but it's not enough," said economist Mariana Dal Poggetto, director of the EcoGo consultancy firm.
The bonds related to Tuesday's agreement, issued under foreign legislation, represent roughly a fifth of Argentina’s US$324-billion debt, which amounts to around 90 percent of its GDP.
As well as its IMF loan, the government must resolve the situation surrounding a US$41.7 billion debt issued under national legislation whose payments have been deferred until December 2021. Then there’s another US$2 billion owed to the Paris club group of country lenders, which is due to mature in May.
Argentina has been in recession since 2018 and the IMF expects its GDP to shrink by almost 10 percent this year, due to effects of the pandemic. Private forecasts predict the contraction will be even deeper.
Already more than a third of the country's population of 44 million live in poverty, and annual inflation stands at 40 percent. UNICEF warned this week that child poverty would reach 63 percent of all children and teenagers by the end of the year.
Argentina is due to repay the US$44 billion to the IMF over the next four years, "which is untenable," according to Capital Economics analyst Nikhil Sanghani.
The government "needs to clear things up with the International Monetary Fund and consolidate the fiscal front," added Dal Poggetto.
But Argentina is increasing its fiscal deficit due to an ambitious plan of subsidies the Peronist government has implemented to help the most vulnerable in society.
"It will be vital for the Argentine government to set credible and sustainable fiscal and monetary policies to support an eventual return to international capital markets" that it lost two years ago, said the vice president of Moody's credit ratings agency Gabriel Torres.
The ‘real problem’
Soon after taking office in December 2018, Fernández suspended the remaining US$13 billion of disbursements from the US$57 billion bail-out loan his predecessor Mauricio Macri had agreed with the IMF.
"The IMF payments begin in September of next year, one month before legislative elections," said Dal Poggetto, adding that the president will need to renegotiate "quickly."
But the "real problem" is that the IMF "doesn't accept discounts" so Argentina cannot come to an arrangement like the one with creditor groups, said economist Emanuel Álvarez Agis, a former deputy economist minister.
The IMF "will ask for a consistent economic plan, whereas so far [the country] hasn't offered more than general terms," said Matias Carugati from Management & Fit consultants.
However, Sanghani believes that "the IMF will provide additional funding to Argentina in a repackaged agreement which also extends the current debt repayment schedule" beyond the current four years.
According to Bloomberg, Argentina aims to reach a deal with the International Monetary Fund over a new financing programme before the end of March, according to a person with direct knowledge of the matter. The government will look to begin formal negotiations with the Fund after September 4, the person said, asking not to be named because the talks are private. Argentina may request to start the talks, a formal step necessary to kick off the negotiations, as early as this month
Still, government officials have publicly said they will take their time..
“There is no rush to start negotiations with the IMF,” said Cabinet Chief Santiago Cafiero in an interview with local TV Pública station late Wednesday. The Fund “has been frank in its understanding of the limits of Argentina’s socioeconomic limits; we hope that will continue.”
The Fernández administration cancelled the previous standby-arrangement with the Fund, and would seek a new “very distinct” agreement, Economy Minister Martín Guzmán said Tuesday after the creditor deal was announced.
IMF Director Kristalina Georgieva praised the deal in a tweet that day, calling it a “significant step.”
Access to credit
In the short-term, the debt deal with creditors "clears maturities, decompresses demand for the dollar and allows for the release of huge fiscal resources to deal with the pandemic," said the Argentine Center for Political Economy. "The eventual access to international credit in the medium term could make company financing cheaper in the pandemic context where leverage is key."
It's a "big step" forward, according to Marcelo Fernández, president of a group of business chambers. "For the small- and medium-sized companies, it means we can bank on policies that benefit financing for production and consumption."
Unemployment has increased to 10.4 percent during the pandemic while the economy shrank by 13.2 percent over the first five months of 2020.
According to Dal Pogetto, the public deficit could finish the year at eight percent of GDP.
The deficit will grow "just like in the rest of the world. The difference is that Argentina, despite the deal, doesn't have access to credit," she added.