Up against the wall

EcoEmerging // 4 quarter 2019  
Up against the wall  
The Macri government faces an emergency situation in the run up to October’s general elections. Confronted with the erosion of  
foreign reserves and its failure to roll over short-term bonds, the government was forced to 1) delay payment of Treasury bonds held  
by local institutional investors, 2) announce debt “re-profiling and 3) tighten capital controls. After this summer’s primary election,  
the opposition is largely expected to take power. The future government will have to manage numerous priorities and will probably  
roll back certain economic liberalisation measures. Yet, it has very little manoeuvring room since it cannot risk breaking off relations  
with the IMF, which is now its main creditor.  
With the approach of the first round of presidential and legislative  
elections on 27 October , Argentina’s economy continues to sink  
1- Forecasts  
017 2018e 2019e 2020e  
into recession. Faced with the erosion of BCRA’s foreign reserves  
and the failure to roll over short-term bonds, the government was  
forced to 1) delay payment of treasury bills held by local institutional  
investors through the end of the year, 2) announce bond  
restructuring and 3) tighten capital controls (see box). The IMF  
supported these emergency measures and is exploring  
rescheduling proposals. Mauricio Macri’s chances of getting re-  
elected are very low, and his main challenger, Alberto Fernandez,  
will have to manage an emergency situation with IMF support.  
Real GDP growth (%)  
Inflation (official, annual average, %)  
Fiscal balance/ GDP (%)  
Public debt/ GDP (%)  
Current account balance / GDP (%)  
External debt / GDP (%)  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate USDARS (year end)  
Pre-election financial crisis  
e: BNP Paribas Group Economic Research estimates and forecasts  
In the primary elections, known as PASO, Alberto Fernandez and  
his vice-presidential running mate Cristina Kirchner reported a big  
lead over Mauricio Macri, triggering a wave of distrust between  
foreign and resident investors alike. The official exchange rate  
plunged to a low of ARG 60 to the dollar before stabilising in early  
September once new capital controls were introduced. Stabilisation  
of the currency is obviously very fragile, since the peso has already  
depreciated by 35% against the dollar since the beginning of the  
year. The blue chip swap, which had disappeared with the  
elimination of currency controls in 2016, widened again to 15%. To  
limit capital flight, BCRA had to raise its key benchmark rate  
were buoyant through August (averaging USD 2.8 bn between  
March and August, with a peak of USD 5.1 bn in August) and will  
probably continue going strong. Indeed, USD deposits, which had  
tripled to USD 32 bn between year-end 2015 and end-July 2019,  
declined by a third until early October, even after the tightening of  
capital controls (although for households, the ceiling on withdrawals  
is rather high). All in all, delayed payment of USD-denominated  
Treasury bills (LETES) - to preserve the banks’ USD liquidity -  
combined with capital controls, failed to reassure deposit holders,  
although it did prevent a run on deposits. If USD liquidity reserves  
were to dry up, the banks would still have access to BCRA swap  
LELIQ) from 60% to 86% before the implementation of capital  
controls, but it has since eased to 73% (with a floor set at 68% for  
the end of October). The BCRA had to temporarily postpone its  
target of a stable monetary base. Lastly, while awaiting the details of  
the government’s bond re-profiling proposal, the risk premium on  
USD-denominated international debt has culminated at more than  
An alarming economic and social situation  
Financial pressures since August can only make an already  
deteriorated macroeconomic situation worse. In Q2 2019, GDP  
continued to contract for the fifth consecutive quarter (down 1.3%  
year-on-year). The cumulative decline since Q2 2018 is 7%, with  
domestic demand making a negative contribution of 14 percentage  
points. All of the components of domestic demand are in decline,  
including public consumption at a time of budget austerity. Despite  
the recession, the federal government’s primary surplus was  
trimmed to only 1% of GDP in August 2019. Unsurprisingly, foreign  
trade made a very strong positive contribution (a cumulative total of  
000 basis points (bp).  
Monetary tightening and capital controls slowed the haemorrhaging  
of foreign reserves, which were down by USD 20 bn compared to  
the mid-July level, but they continued to erode by USD 120 million a  
day through early October, to USD 48 bn. After deducting the USD-  
denominated deposits of commercial banks, IMF loans to BCRA,  
and the currency swap agreement with China, net reserves had  
dwindled to only USD 13 bn in mid-September. According to the  
BCRA’s monthly balance of payments statistics, net purchases of  
external assets (the vast majority of which are net dollar purchases)  
pp since Q2 2018), but this was due to a sharp contraction in  
imports, and not to the dynamic momentum of exports. The  
international cyclical environment has not helped either. Soybean  
prices have picked up after bottoming out in early May, but wheat  
and corn prices are still depressed.  
The elections cover half of the 257 seats of the Chamber of Deputies and a  
third of the 72 Senate seats. Gubernatorial elections for five provinces, including  
Buenos Aires and Grand Buenos Aires, will also be held on 27 October.  
EcoEmerging // 4 quarter 2019  
The social situation is alarming. Inflation dropped back to a monthly  
rate of 2% in July, but accelerated again to 4% in August, and  
should hold within a range of 4-6% through the end of the year. This  
would boost year-on-year price inflation to close to 60% in  
December. Since early 2018, the cumulative loss of real wages had  
already hit 15% at the end of July. Over the same period, social  
welfare benefits were slashed by 12% in real terms as well. The  
official unemployment rate rose to 10.6% in Q2 2019, from an  
average of 8.5% in 2017. A large portion of the middle class was  
impoverished over the course of the past year.  
The emergency measures introduced on August, the 28 and  
September, the 1st  
Mandatory delay/extension of the maturity of Treasury bills  
The payment of Treasury bills (mainly LETES in pesos and LECAP  
in dollars) held by local institutional investors has been delayed for 6  
months for those reaching maturity before the end of 2019, and for 3  
months for those maturing in 2020. Interests will continue to be paid.  
Bond debt re-profiling  
The government will ask parliament to approve a project to  
reschedule the 2020-2023 calendar of principal repayments of the  
bond debt issued under the Argentina law and held by local  
institutional investors. As to the international bonds hold by private  
creditors (USD 66 bn), the government will propose to reschedule  
repayments as well. In both cases, there would be no haircut. The  
government has also asked the IMF to reprofile the repayment of  
credit lines already disbursed.  
Even if debt restructuring is carried out smoothly and the IMF shows  
some flexibility in the face of the gravity of the economic and social  
crisis, Argentina’s economy seems to be headed for a second  
consecutive year of recession.  
Managing priorities  
The state’s debt load has become excessive despite a restrictive  
fiscal policy. Major fiscal efforts were taken in recent years to  
address the situation (the primary deficit was still at 4.2% of GDP at  
year-end 2016), but they failed to stabilise the federal government’s  
debt ratio, which should reach about 95% at end-2019, up from  
Capital controls  
The BCRA has imposed time limits on the repatriation of export  
revenues. Companies will need an agreement of the BRSA for i)  
the payment of imports of more than USD 2 mn ii) payment of  
services to foreign companies (except those linked to tourism), and  
iii) dividend payments.  
Companies are not allowed to purchase dollars for savings  
purposes. Resident individuals are allowed to buy up to USD  
10,000 per month and 9/10ths would have to be held in an account  
with a local bank.  
Limitations to new USD obligations are introduced; bonds issued in  
international bond markets would have to be transferred and  
converted into pesos. Residents are not allowed to access the  
official FX market to honour new debt obligations in foreign  
currency if that debt is between residents.  
52.6% at end-2015. Granted, net interest charges have doubled  
from 1.3% of GDP at end-2015 to 2.7% at end-2018, but the sin is  
an excessive foreign currency debt (80% of federal government  
debt is in foreign currency). Until now, the authorities have tried to  
avoid asking for a debt haircut, which would open the door to  
litigation with potential holdouts. Thus, although debt restructuring  
should provide some respite, it will not solve the problem of  
stabilising the debt.  
In the short term, the most urgent need is to ease the debt burden in  
USD and to stabilise inflation. Yet this creates conflicting monetary  
policy targets. Legally, the government has the option to repay its  
USD debt under Argentine law in pesos, and, for that, it could be  
tempted (or forced) to resort to monetary financing. Even if the IMF  
were to agree to ease its quantitative control of the monetary base,  
it is unlikely to accept such a potentially inflationary solution.  
Lastly, forex arbitrage operations between the official and informal  
markets would be limited as well.  
Source: Global Source Partners, BNP Paribas  
Moreover, the social crisis will probably force Alberto Fernandez to  
roll back a number of liberalisation measures introduced by the  
Macri government. At the least, this would entail freezing energy  
and transport prices, and possibly even the reintroduction of  
subsidies for low-income households. At the same time, to contain  
the inflationary effects of currency depreciation and to preserve  
USD liquidity, we can expect to see higher export taxes, import  
restrictions and even some price control measures.  
The government currently has very little fiscal space. At a little more  
than 20% of GDP, primary spending is double the 2003 figure, and  
the pension shortfall amounts to 4% of GDP, compared to 2.5% in  
2003. It will be hard to reduce structural inflation due to the legal  
obligation to index social welfare and pension benefits to past  
inflation. Lastly, the external environment is much less buoyant: the  
upward phase of the commodity price cycle in 2003-2007 will not be  
The more immediate risk is that the future government might decide  
to distance itself from the IMF, as E. Duhalde and N. Kirchner did in  
002-2007. This seems very unlikely, especially since Argentina  
owes the IMF USD 44 bn. Moreover, the current situation is very  
different and much less favourable than the one in 2002-2007.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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