By Allison Fedirka
This week the Argentine government will resume attempts to negotiate a debt settlement with holdout creditors from the country’s 2001 default. Yesterday, Argentine Finance Secretary Luis Caputo met with court-appointed debt mediator Daniel Pollack and representatives of the holdouts in New York. The meeting will continue today. Argentina’s stalemate with these creditors has been a major point of controversy and has limited Argentina’s access to international lines of credit and capital markets. This meeting is part of Argentine President Mauricio Macri’s efforts to return the country to capital markets, attract more investment and grow the national economy.
Our model has identified a growing distinction between the Eastern and Western hemispheres. The United States currently stands as the center of gravity in the Western Hemisphere, but we expect increasing stability and, in the long term, increasing economic activity in Latin America as well. Right now, an element of our model may be falling into place in Argentina, Latin America’s third largest economy. Macri’s recent efforts to negotiate with holdouts and his talks with investors at the World Economic Forum in Davos could pave the way for significant foreign investment in Argentina, provided he can simultaneously mitigate domestic challenges.
The goal of the meetings with holdout creditors is to define an agreement that allows Argentina to pay back a now $10 billion debt in a manner acceptable to the holdout creditors. The parties have kept details of the conditions and proposal private and are not expected to release them until an agreement is reached. Argentina’s previous government was unable to make significant headway in these negotiations and ended up falling in to a technical default in the summer of 2014. A resolution of this debt would not only lift the country out of technical default, but also help it access international capital markets.
In preparation for these negotiations, Macri has taken measures to help strengthen Argentina’s negotiating position and repay the debt. On Jan. 29, the government confirmed a $5 billion loan from a group of private, international banks that have brought Argentina’s Central Bank reserves above $30 billion. Initially the government contemplated getting $8 billion to $10 billion worth of loans for this negotiation but later lowered the expected range to $4 billion to $6 billion. HSBC, JPMorgan and Banco Santander will each provide $1 billion while Deutsche Bank, Banco Bilbao Vizcaya Argentaria, Citigroup and UBS Group will each put forth $500 million. That reputable private banks are willing to bet on loans to the Argentine government signals a vote of confidence in the country’s government and economy.
The government also laid a foundation for attracting more investment to the country during the World Economic Forum in late January. During this gathering, Minister of Treasury and Finance Alfonso Prat-Gay affirmed that Buenos Aires would allow the International Monetary Fund (IMF) to audit Argentina’s accounts and issue policy advice to the government, which has not been the case for nearly a decade.
Meanwhile, Macri announced his intention for Argentina to formally request membership in the Organisation for Economic Co-operation and Development (OECD). Additionally, he met with executives from major multinational corporations and announced his intention to bring up to $20 billion worth of investments into the country in 2016. In the last five years, Argentina’s foreign direct investment has lagged behind other countries in the region – such as Brazil, Chile, Colombia and Mexico – totaling just over $6 billion in 2014. Bringing the country in line with international financial organizations such as the IMF and OECD will also help boost the country’s image to investors.
Parallel to these international efforts to revitalize the country’s economy and investment inflow, Macri is confronting some domestic challenges that could damage the positive image he is so carefully building to attract investors. Major issues include utility subsidies, grain sales and pay-raise negotiations. Starting on Feb. 1, the government eliminated electricity subsidies to approximately 80 percent of residential users in the greater Buenos Aires area. The government is also considering limiting natural gas subsidies as well. The removal of electricity and gas subsidies is expected to save the government up to $11 billion. However, it also means that consumers will be paying two to three times more for the base rate of electricity and up to five times more on the total bill once consumption levels and taxes are factored in. For example, the base rate for 301-650 kilowatt-hours (kwh) of consumption will go from 16.20 pesos ($1.14) to 60.14 pesos. The variable rate added on for this range will go from 0.043 pesos per kwh to 0.459 pesos per kwh. As an example, a bill for 450 kwh will rise from 57.64 pesos to 353.60 pesos. Such a large price increase means that once consumers start receiving higher bills, there is a strong possibility that discontent could manifest in some form of protest.
In March, soybean season begins. When the government removed barriers and taxes on some agricultural exports in late 2015, Treasury and Finance Minister Prat-Gay said he expected $400 million to come into the country per day from soy and grain exports. So far the average has been about $250 million per day, and to date only a total of $4.1 billion has been received. This inflow of U.S. dollars is also important to help prop up Central Bank reserves during the negotiations with holdouts and potentially during future debt payments. The government will feel pressure to motivate farmers to sell stored grain in addition to the upcoming harvest in order to bring in the desired U.S. dollars. There is already some speculation in local media that the government could backtrack a bit on its grain export policies if exporters do not sell sufficient volumes.
Along with the soybean season, March brings pay-raise negotiations. In Argentina, wage negotiations are not strictly between a company and its workers but also include the government as an intermediary that seeks to protect state interests. For example, rather than see a workers’ strike paralyze the country or companies relocate, the government could say it will pay more money into social spending programs that benefit workers. Workers in turn would agree to reasonable wage raises and companies agree to pay. So far this year, major unions have disagreed with the initial government proposal to keep increases between 20-25 percent this year. The idea behind this was to try to keep inflation at 25 percent or under in 2016. Workers initially said that they would not accept raises of less than 30 percent, which is in line with inflation estimates for 2015. However, a recent agreement with oil workers illustrates additional tools, such as employment security, that the government could use in negotiations to breach the gap between each party’s demands. In this case, the government paid major oil companies $5 billion to keep workers employed, avoid layoffs and therefore avoid strikes that would lead to production interruptions and social unrest.
Any of these domestic issues could spur large-scale social unrest in the country, which would be detrimental to Macri’s efforts to attract foreign investment. These domestic challenges are not insurmountable, but will require skillful management by the government to improve public perception about domestic stability. If successful, this domestic stability combined with the aforementioned overtures to international financial entities could help relaunch the country’s image as a desirable location for investment. While this will take time, there are some positive indicators that the country is slowly making its way toward this path. Geopolitical trends that develop slowly and steadily – such as stability and more favorable business conditions materializing in Latin America – may not always make the headlines, but this does not mean they are any less significant. We cannot predict exactly how or when the Argentine government will reach an agreement with holdouts. But it is clear that as China’s manufacturing sector declines, Russia’s economy falls and Italy’s banks face an impending crisis, Argentina stands out as an economy on a path to improvement.