Why is country risk declining and what impact will this have on the Argentine economy?

In recent days, the evolution of country risk has become more relevant. Indicator JP Morgan It is a benchmark for investors and, in simple terms, measures the difference in price between US Treasuries and emerging market debt issues.

In the case of Argentina, the country risk reached break the 7,000 points barrier in 2002in the midst of a crisis due to the collapse of convertibility, the “corralito” of deposits, the sovereign default declared in December 2001 – and lasting until February 2005 – and asymmetric pesification.

In recent years, domestic country risk has reached will exceed 4,000 basis points in March 2020when the world began to implement restrictions due to the pandemic that sank the global economy, at the same time that the government of Alberto Fernandez was negotiating a debt restructuring with private creditors, which was only completed in August of the same year, which brought the country risk to 1100 points .

Now the government Javier Miley managed to improve the market’s perception of sovereign solvency, which led to a reduction in country risk. this Friday the level is 981 basis points

below 1000 units for the first time since August 9, 2019 – the day before the presidential PASO – when the indicator recorded 860 points.

1) Guarantee of payment of bonds. Minister Louis Caputo confirmed in an interview Financial Times that Argentina received a loan for almost three years from private banks in the format REPOto face government debt repayments to bondholders in January. He also assured that “if interest rates allow it”, he would seek to return to international credit markets to refinance the July maturity.

This last step is key because in the future, if there is an open and growing economy, the government will need to refinance maturities instead of paying them in “cash”, as has been done until now, which did not allow a significant increase in the Central Bank’s reserves – about $29 billion, even with official purchases on the foreign exchange market amounting to more than $18 billion since December. last year.

To return to international markets, the Government needs a country risk of less than 500 basis points for dollar debt issuance below 10% per annum. The rate, if we take into account that based on comparison, the cost of ten-year US Treasury bonds today reaches 4.126% per annum. We must not forget that we had to negotiate with the IMF in May 2018 due to the difficulty of maintaining the payment schedule with private creditors, after issuing dollar bonds with a rate of less than 7% in January of the same year. annual.

2) BCRA buys dollars. Monetary authorities are maintaining market purchases at around US$1.2 billion in October, which is very high for this stage of the year due to the seasonality of foreign trade. At the same time, the steady growth of dollar deposits (more than US$31 billion, close to the 2019 high) is also fueling the recognition of money laundering, a symptom of restored confidence in economic policy.

3) Dollars from multilateral organizations. The good harmony with the International Monetary Fund (IMF) has become evident in recent hours, following Minister Caputo’s interview with the organization’s managing director, Kristalina Georgieva. Given that Argentina’s still high country risk prevents the issuance of new debt in international markets, the foreign currency credit that the government can obtain from multilateral institutions plays a very important role. He The World Bank and IDB are set to provide $8.8 billion in financing.of which approximately $2,000 is expected to be disbursed by the end of the year.

4) FATF “approval”. Plenary meeting of the Financial Action Task Force on Money Laundering (FATF) announced this Thursday in Paris that Argentina was not included in the “grey list” in the fight against money laundering and terrorism. The organization approved the mutual evaluation report submitted by the country, which was noted by the government of Javier Miley. The declaration allows investment by foreign companies that, if Argentina were on the gray list, would be prohibited from operating due to legal restrictions in their countries of origin.

5) Budget surplus. It’s probably data that follows the market in more detail as this is a sign of the government’s ability to repay the debt and largely explains why Argentine dollar bonds yield an average of 60% gain

in 2024. When it comes to bonds, the rates of return on these assets move in the opposite direction of their market price. The more fragile a country’s economy is, the cheaper its government bonds – a means of financing governments – and therefore those countries must offer higher yields on their debt for investment funds to be willing to take on investment risk.

Is expresses Javier Miley’s desire to maintain a surplus government accounts, which has been going on for ten months in a row. “In Argentina, firm implementation of the program is helping to restore macroeconomic stability,” notes the latest American Economic Outlook report published by the IMF. From reading the document, it is clear that Argentina is the only country in South America with a government account surplus this year, but it is also the only country to record a contraction in economic activity.