Argentina Markets in Freefall, But at Least We Still Have Messi

As the race for the Presidential Elections continues in Argentina, the Federal Government, led by Mauricio Macri, just took another dangerous step closer to the precipice. Their decision to impose ‘partial’ capital controls in Argentina in a desperate attempt to appease voters and to buy time ahead of the October elections disappointed (again) not only the markets but those whose favour they hoped to earn. The feared measure returned to Argentina after its four-year hiatus when Mauricio Macri liberalized the FX market, breaking with the legacy of the Kirchner administration when capital outflows were severely regulated by the Federal Government.

Here a brief summary of the announcement made by the Central Bank of Argentina:

• Argentines can buy up to US$10,000 a month, or can transfer the same maximum amount to a foreign account.
• Non-residents can buy up to US$1,000.
• Companies require authorization to distribute dividends abroad or to buy USD in the FX market.
• Companies are not allowed to buy dollars for the purpose of savings.
• Companies have no restrictions to buy dollars if they are used to comply with foreign trade transactions.
• There are no restrictions for individuals and companies that want to withdraw dollars in cash.
• The Central Bank also imposes a five-day limit for companies to repatriate foreign currency.

The good news is that the measure seems to be working so far, with the ARS trading at 59 per dollar. To put that into perspective, some local banks were selling the USD at 64 ARS just last week. However, the market remains not only sceptical but is operating in a distinctly cautious mode as their trust of the Federal administration diminishes.

The embarrassing measure also comes alongside the announcement of 28 August when the government presented a plan to restructure short-term debt maturities. Argentina postponed US$7 Bn. of short-term local debt for up to 6-months with an additional ‘voluntary’ reprofiling of US$50 Bn. in long-term debt. Apparently, the IMF is unhappy with the news because the government will also delay the repayment of US$44 Bn owed to the multilateral.

In the uncertain political landscape, the IMF has already met Alberto Fernandez, Macri’s leading competition for Presidency, during a visit in August, because the Washington-based-entity is concerned to recover the unprecedented and already disbursed US$44 Bn. bailout in the scenario that he wins. The remaining US$5.4 Bn. disbursement pending by the IMF, which was planned by 15 September, is now being closely monitored by the multilateral as Fernandez takes strong steps towards winning the presidency in Argentina. Fernandez is known for being a tenacious opponent to the IMF and its bailout, blaming the entity in recent weeks for the capital flight in Argentina.

After the recent events, S&P has placed Argentina in the ‘selective default’ territory, the Argie CDS now indicates an 85% likelihood of default in the next 5 years (as of 30 August), while the 100-yr bond trades at 41 cents a dollar. Furthermore, the Central Bank of Argentina keeps losing international reserves at a record pace in the attempt to moderate the peso depreciation. The day before the primaries, the CB reported US$66.4 Bn. in international reserves, but after the recent events, the bank has lost approximately US$13.3 Bn in reserves, now totalling US$53.1 Bn. Direct intervention in the FX market to control devaluation is now the day-to-day tool of the CB to try to contain the peso freefall, but as investors keep abandoning Argentina, the task  is set to be more difficult than ever.

Chart 1: Argentinian 100 Year Bond

Source: Bloomberg

Unfortunately, polls in Argentina have a long history of differing from the real results by huge margins. But considering the results presented by Gustavo Cordoba & Asociados – the company that forecasted the biggest difference for Alberto Fernandez in the primaries – the Fernandez-CFK formula looks strong with a stunning 50.7% voting intention going their way in the polls, enough to win the elections in the first round. The Macri-Pichetto formula runs second in the 30% voting intention area, and Roberto Lavagna runs third with a total support of 6.9%. This said, it is very likely that Argentina will see the return of the Peronist Party to the Pink House next December.

The silver lining is that Barcelona is about to face Valencia next week in the Spanish league and, more interestingly, will face Borussia Dortmund for the Champions League on the 17 of September. So at least we still have Messi.

Miguel Ovalle has been a credit analyst covering Latam spectrum for corporates and macroeconomics related issues. He previously worked within S&P Global as a credit research analyst.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)