Walter Molano | Argentina: The morning after

Foreboding skies and driving rain bolster the sullen mood in Buenos Aires. The long weekend was full of recriminations, interviews and Monday-morning quarterbacking.

Economy Minister Nicolás Dujovne tendered his resignation, and he was replaced by Hernan Lacunza. He was economy minister for the province of Buenos Aires, under Governor Maria Eugenia Vidal.

Lacunza is a graduate of the University of Buenos Aires, and did his postgraduate studies at the Di Tella Institute, the leading economic research centre in Argentina.

He held several important economic roles in government institutions, and was the central bank’s chief economist under Martin Redrado. Lacunza was slated to meet the International Monetary Fund (IMF) mission on their arrival in Buenos Aires.

There was talk that the IMF was considering delaying the mission, given all of the political uncertainty. There is also talk that the relations between President Mauricio Macri and the Ecuadorian political strategist, Durán Barba, have deeply soured. It is still not clear what the future of Chief of Staff Marcos Peña is.

People close to the administration say that the government still believes that it can turn the situation around and win in October. They point out that during the presidential elections of 2015, more than two million people voted in the October elections who did not vote in the PASO. Of this total amount, enough went to Macri to force the run-off elections.

The government is hoping that this phenomenon will repeat this year, but some political analysts have their doubts that it will tip the scales in Macri’s favour.

Society is suffering

The reality is that the fiscal adjustment was brutal, and the society is suffering. Argentina has the third highest misery index – the inflation rate plus unemployment rate – in the world. Venezuela tops the list, followed by Zimbabwe. Iran is ranked fourth. Therefore, it is natural that the Argentine electorate is angry.

Alberto Fernández gave a lengthy interview to Clarin, which was published in last Saturday’s newspaper. The presidential candidate admitted that he was not that surprised by the PASO results, although they were better than expected.

He acknowledged his support to the president in attending to the ongoing crisis, and fully threw his support behind the central bank’s actions regarding the currency. He expressed his desire that the central bank not burn through the nation’s international reserves.

Fernandez praised some of the measures that were done under Macri, such as the restoration of the national statistics agency, INDEC, and he clearly differentiated himself from the Kirchner legacy. Moreover, he said he would assist in any talks with the IMF.

However, he changed his tone in regard to the country’s external obligations. In previous interviews, Fernandez said he did not intend to default on the country’s debt. This time he admitted that the country did not have the dollars to meet its current obligations, and that it would need to sit down with each creditor to negotiate.

Fernandez then went on to eulogise the role of Guillermo Nielsen in securing a 75 per cent haircut on bondholders. While he never used the word ‘default’, and he clearly intends to renegotiate the IMF Standby Facility, these statements seemed to suggest that he was changing his tone on the country’s sovereign debt.

Almost in anticipation of the Clarin interview, two of the leading credit rating agencies, Fitch and Standard & Poor’s, lowered Argentina’s credit ratings. Fitch cut its rating to CCC from B, and Standard & Poor’s dropped it to B- from B.

While they based most of the downgrade on the political situation, questioning whether the government would still have access to the capital markets in case of a Fernández-Fernández victory, the new economic measures announced by President Macri at the end of the week will also affect the country’s credit situation.

The elimination of the VAT and the other tax measures will increase the primary deficit to two per cent of gross domestic product for 2019 and 2020. This, along with some other factors, violates the conditions of the IMF Standby Agreement, which will require negotiations and waivers.

More than US$5 billion in funds are scheduled to be disbursed next month. This was one of the reasons the IMF had dispatched a mission to Buenos Aires. The reduction in tax revenues will also hit the provinces, since it will reduce the amount of funds that will be co-participated. Therefore, as the dust settles from last week’s debacle, the situation is looking a little worse than it seemed.

It is not clear if Alberto Fernández’s interview was another campaign strategy to scare the market. Nevertheless, we could see an increase in volatility from last Friday’s lull.

The only bright light would come from the IMF mission. Hopefully, there is a three-way announcement that provides some more clarity and relief to the situation.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.wmolano@bcpsecurities.com