Argentina’s Minister of Economy Martin Guzman presented the country’s debt sustainability framework last Friday while, in a seemingly coordinated move, the IMF published a technical note on the country’s public debt sustainability at the same time. Neither will give bondholders much comfort. We were disappointed by the long-awaited government presentation, while the IMF’s analysis will reinforce investor concerns that that Fund has gone soft on Argentina (although maybe there are mitigating circumstances now). We think this signals sizeable losses to bondholders ahead, although this conclusion may come as no surprise to investors by now. Whether creditor power can resist this remains to be seen. And an IMF programme itself also still seems some way off, if at all.
We think the government’s presentation was disappointing; after waiting three months, we might have expected it to say more and give more detail, although it may be that the authorities have relied on the IMF to do this for them instead. And maybe waiting was wise with hindsight as the impact of Covid-19 radically changes things anyway. But the presentation was largely devoid of anything new, an ex-post rationalisation of a decision to restructure this government took some time before it even entered office.
The government’s presentation contained two key points in our view. First, it set out the perimeter of the commercial debt restructuring, with eligible debt amounting to US$83bn, consisting of privately held foreign currency debt under both local and foreign law (although the figures seem to differ from those published by the IMF). This had, however, been reported in local media in previous days. The biggest chunks of eligible debt are the foreign bonds – the Kirchner bonds and the Marci bonds – which amount to a total of US$65.5bn. That might be reassuring to some investors who might have feared the Kirchner bonds would be excluded – whether they are treated the same or better, we’ll still have to wait and see.
Second, the additional fiscal effort being adopted by the government in its debt strategy appears to be limited. The government’s fiscal path shows a primary surplus of between 0.8-1.2% of GDP over the medium-to-long term; the higher end of the range being its optimistic scenario, which sees real GDP growth averaging 2% per annum, while the lower-end being its pessimistic scenario, with growth averaging 1.5%. This compares with an expected primary outturn for 2020 of -1.6% of GDP, according to the IMF, given an expected deterioration from the impact of Covid-19 (and as we’ve noted before, ex-President Macri did a lot of the heavy lifting already in terms of reducing the primary deficit).
Meanwhile, the IMF’s technical note, which provides more detail and analysis, highlights two key targets for a debt restructuring operation, in our view. First, a reduction in the ratio of debt (defined as federal government debt owed to private creditors and official creditors) to GDP from 56% currently to 40% or below (this definition excludes intra-government debt, which would be treated differently; total public debt was 88% of GDP at end-2019, according to the IMF). Second, cashflow savings from a debt operation that will ensure future gross financing needs (GFNs) – essentially debt service – are sufficiently low; a move that we had anticipated following the Fund's approach with Ukraine (2014) – see Argentina: Dreaming of Uruguay dated 10 October. The IMF states that there is virtually no scope for FX debt service payments to private creditors during 2020–24 (probably to ensure the IMF gets paid, in our view), while gross financing needs should average no more than 5% of GDP after 2024 (and not exceeding 6% in any year). Foreign currency debt service should average no more than 3% of GDP after 2024. For reference, the IMF states that GFN for 2020 (pre-restructuring) are US$49bn (c13% of GDP) while foreign currency debt service is US$22.5bn (6% of GDP). We think the combination of these targets imply a sizeable haircut in nominal and cash flow terms and will be met by disappointment among bondholders.
This is an abridged version. Read the full report here.
Recap of the week’s key credit developments
Ecuador (ECUA): Ecuador announced on Monday it is seeking IMF support whilst suspending upcoming interest payments on certain bonds. The IMF announced on Monday that Ecuador has expressed its intention to seek emergency financial support through its rapid financing instrument (RFI) and, it seems, a new IMF programme. Meanwhile, the authorities paid the 03/2020 bonds due 24 March, amounting to US$325mn in principal, although the government announced that it will suspend some US$200mn on upcoming interest payments on the 2022, 2025 and 2030 bonds using their grace periods. This week, Fitch and S&P lowered their long term foreign currency ratings to CC from CCC and CCC- from B-, respectively. S&P has a negative watch on its rating, citing risks to debt service. Our view: A request for IMF emergency support may be no real surprise. Ecuador has been perceived by investors as being among the more vulnerable EM countries to the impact of coronavirus given its already fragile position and lower oil prices. We think continuing IMF support and the authorities' commitment to sound policies and its responsible approach will be welcomed by investors, although it may raise residual concerns about the IMF programme design (such as investor burden sharing) and the authorities’ limited room for manoeuvre (Plan B). Under current circumstances, we would expect bondholders to be sympathetic to a temporary payment delay, which is unexpected but allowable, and better than the alternative. See our recent report here.
Ukraine (UKRAIN): Local reports from Kiev this week suggest the country is close to reaching an agreement in Parliament on a bill that should help to secure a new IMF programme. The bill (so called anti-Kolomoisky bill) is aimed at preventing nationalised banks being returned to their former owners (notably Privatbank). Local reports suggest a new IMF programme will be up to US$10bn in size, much bigger than the US$5.5bn that had been anticipated at the time of staff level agreement in December. This follows news late last week that Ukraine is seeking to tap funds from the IMF’s emergency financing facilities to help countries deal with the coronavirus pandemic. There was, however, no mention of how much Ukraine will request. Announced on 4 March by the IMF, US$40bn of the total US$50bn has been set aside for emerging markets (such as Ukraine), through its existing rapid-disbursing emergency facilities. If Ukraine seeks 100% of quota, the normal maximum allowable under these facilities, that would amount to US$2.7bn we think. Reserves stood at US$27bn at end-February. Note, however, that this isn’t the IMF programme we’ve long been waiting for. Discussions on that new programme continue, as noted above. See our recent report here.
Brazil (BRAZIL): Data released by Brazil’s statistics agency (IBGE) shows that inflation fell below the central bank’s target rate of 4% this month. The index of consumer price inflation (IPCA-15) was 3.7% yoy for March, versus 4.2% in February, reflecting lower food and transport price inflation. This could now allow for further monetary easing as coronavirus cases rise in Brazil. The central bank (BCB) cut its Selic interest rate on 18 March to 3.75% from 4.25%, citing global economic consequences of the coronavirus outbreak. Lower global oil prices could also ease inflation and enable a further cut; the next scheduled monetary policy meeting is in May.
CEEMEA new issues: Despite the market chaos, this week saw the return of some high-grade issuance from Slovenia and Latvia. On 24 March, Slovenia (Baa1/AA-/A) issued a new three-year (March 2023) EUR850mn at a coupon of 0.2% with a yield at issue of 0.253% (spread MS+50bp) and a EUR250mn tap of the existing EUR1.85bn 1.1875% 2029. On 26 March, Latvia (A3/A+/A-) tapped its existing EUR950mn 0.375% 2026 bond with a EUR550mn at a spread of MS+50bps.
Global policy response to Covid-19: In a press release on Monday, following a conference call with G20 finance ministers, the IMF said amid the coronavirus pandemic that it expects a recession in 2020 at least as bad as the global financial crisis, before a recovery in 2021. It also noted that emerging markets would face significant challenges, and that capital outflows from emerging markets since the start of the coronavirus outbreak had been the largest ever recorded. The Fund is working with the World Bank to support indebted low-income countries, which could face debt distress. Nearly 80 countries had sought IMF support by Monday, and several had requested financial support under the Fund’s US$50bn coronavirus response announced on 4 March. The Fund expressed support for expansionary fiscal and monetary policy moves.
In our universe, the following monetary policy decisions have been made this week:
- Pakistan: Pakistan’s central bank lowered its policy rate by 150bps to 11%, seven days after the last cut of 75bps. The government has also announced a PKR1tn relief package. The expansionary policies are intended to support certain economic sectors during the coronavirus lockdown. See our partner IMS’ research here.
- Kenya: On Monday, Kenya lowered its central bank rate by 100bps to 7.25%, after new coronavirus cases were reported in the country. The cash reserve ratio was also cut by 100bps to 4.25% to support financial sector liquidity. The central bank’s real GDP growth for the year has been revised down to 3.4% from 6.2%. See our research here.
- Nigeria: The CBN left its policy rate on hold at 13.5% on Tuesday, although it announced a devaluation of the naira last Friday of 14% in the official rate and 4% in the market (I&E) rate. See our research here.
- Albania: On Wednesday, Bank of Albania cut its policy rate to 0.5% from 1%, cut the overnight lending facility rate to 0.9% from 1.9% and maintained its overnight deposit facility at 0.1%.
- Namibia: The Bank of Namibia lowered its repo rate by 100bps to 5.25% on Friday to stimulate growth amid the coronavirus outbreak and deteriorating financial conditions.
- Moldova: On Friday, Moldova lowered its base rate to 3.25% from 4.5%, its second cut this month after a 100bps cut on 4 March, to strengthen banking sector liquidity and to support the economy.
- Mexico: On Friday, Mexico’s central bank lowered its benchmark rate by 50bps to 6.5%, due to monetary easing in other countries stemming from the coronavirus outbreak. The Governing Board also decided to take measures to provide additional liquidity to the banking sector. Inflation is currently above the target of 3%, as the 3.7% yoy figure from February was repeated in the first-half of March.
- Philippines: The central bank will purchase 300bn pesos (US$5.8bn) of government debt from the Bureau of the Treasury under a three month repurchase agreement, which is renewable for another three months. The government will use the funds in its coronavirus response. Lawmakers have also given President Duterte additional powers, as economic growth is expected decline to 4.3%, or lower if the coronavirus crisis continues beyond June. This compares to 5.9% in 2019.
- Thailand: Emergency 25bps rate cut announced on Friday.
- Russia: One of the few central banks not to cut rates yet, it kept its policy rate unchanged at 6% on Friday.