Political surprises result in emerging market volatility spike: Recap the week’s events.
The Argentine government appointed Hernán Lacunza as the economy minister to replace Nicolas Dujovne, who resigned earlier in the week.
Lacunza will meet with advisers and economists linked to the Alberto Fernández ticket over the coming days with the key goal of smoothing the current turmoil in markets and stabilising the FX.
It is a difficult task given the opposition is not incentivised to clarify its policies ahead of the election, but Fernández will likely be motivated to take over an economy, should he win the presidency, that stands a chance of recovery under the new administration.
To this end, we have seen attempts by the Fernández camp over the last couple of days to soften the comments he made over the weekend regarding debt renegotiation.
Debt market impacts
Another near-term catalyst for Argentina as a credit is the International Monetary Fund (IMF) visit, which is scheduled ‘soon’ according to the IMF spokesperson Gerry Rice. The IMF needs to complete its fifth review in order to approve the next disbursement of USD5.4 bn worth of bailout loans.
We believe the outcome of this review will be critical to the near-term performance of the credit as the IMF will be faced with a new economy minister and the prospect of disbursing monies under the current programme, when Alberto Fernández has made it clear that if he were to take office he would seek to renegotiate the IMF deal.
Looking at the banking system, peso deposits are down approximately USD1.6bn (to around USD31bn) since primaries and international reserves are down USD6.9bn (to approximately USD59bn).
There was also a repo transaction with international banks that triggered given the trading levels of bonds, forcing the Treasury to repay funds early.
The resultant return of collateral has reduced the Treasury debt stock by around USD12.8bn as the repo transactions were over-collateralised.
Over the coming weeks, we would expect to see renewed inflationary pressures given the devaluation in the Argentine peso while growth forecasts are also likely to be revised down.
The severity of both will be a function of the level of co-ordination and willingness between the existing Macri administration and the likely Fernández administration.
The inevitable lack of clarity over the medium-term outlook, and challenging rollover schedule in coming months, will likely lead to continued volatility in asset prices.