Featuring: Argentina | LEBANON | SOUTH AFRICA
This week we highlight Lebanon’s march toward a sovereign debt restructuring, Argentina’s continuing dialogue with the IMF and private bondholders, and South Africa’s 2020 budget that is unlikely to deliver a credible fiscal consolidation plan.
Argentina’s dialogue with the IMF and bondholders in the spotlight
Market Event: The IMF published its official statement following its visit to Argentina this week stating that it views the country’s debt as unsustainable. The Fund sees the fiscal adjustment necessary to put debt on a sustainable path as politically and economically unfeasible and as such will require meaningful private creditor contributions. The focus will now shift to Guzman’s meeting with the IMF’s Managing Director, Kristalina Georgieva, at the G20 Finance Ministers meeting on February 22-23 as well as the consultations between the government and bondholders through the end of the month. Meanwhile, the Central Bank of Argentina (BCRA) continues to aggressively loosen monetary policy with another 800bps reduction in its policy rate over the past week.
Gramercy View: The approach taken with the government’s sizeable maturities with the IMF as well as the willingness of both parties to enter into a new arrangement will be a key element of the debt restructuring process. While the official statement was taken as a marginal negative by the market, (indicated by a slight decline in bond prices), the ultimate implications remain unclear. There appears to be flexibility from a policy perspective, albeit uncertain at what cost to bondholders. Additionally, there is still little insight on the path, timeline, and intent of the authorities or Fund with respect to a new arrangement and the government’s amortization profile with the IMF. While the meeting between Guzman and Georgieva should be constructive, it is unlikely to move the needle significantly in terms of the overall process. Meanwhile, dialogue between investors and the government should begin to provide an indication of the scope of work ahead to reach a deal. However, it seems likely that the authorities will use these meetings as an opportunity to collect viewpoints as opposed to extend materially new information. Lastly, successful, albeit temporary, stabilization of the macroeconomic situation has reduced the market’s near-term focus on variables such as rate cuts and inflation, but we believe it remains imperative to continue to monitor and analyze the medium-term consequences of these policies. The scope of monetary expansion in recent weeks poses ample upside risks to inflation as well as complicates any removal of capital controls given negative real rates over the medium-term.
Lebanon heading towards a sovereign debt restructuring
Market Event: Lebanon’s sovereign Eurobond curve shifted materially lower this week, as investors started to question more seriously the authorities’ willingness to repay the upcoming 2020 maturities ($1.2 billion in March, $0.7 billion in April and $0.6 billion in June) and to price in significant haircuts for bonds maturing after 2020-21.
Gramercy View: Regardless of whether or not the government decided to honor all or some of the 2020 maturities, an eventual restructuring of Lebanon’s very large sovereign debt burden (~155% of GDP) and interest burden (close to 50% of government revenues) appears to be only a matter of time. A decision to remain current on all 2020 debt obligations will likely accelerate the path towards restructuring as it might generate a significant political/social backlash and will further undermine the government’s fragile credit profile by depleting scarce FX resources. We are of the opinion that the authorities will do everything in their power to avoid a disorderly debt default and will work on devising a comprehensive plan to deal with the debt problem, but this process will take time. The uniquely complex dynamics and characteristics of Lebanon’s political environment suggest a prolonged and complicated restructuring process and do not bode well, in terms of possible IMF involvement at the level of a formal financial assistance program and reform conditionality, at least for the time being.
South Africa’s 2020 budget to provide limited confidence on ability to achieve near-term debt sustainability
Market Event: The government is set to present its 2020 budget on February 26. The scope and credibility of the government’s fiscal consolidation plan will drive expectations on the country’s credit trajectory and asset prices as well as the timeline for a Moody’s downgrade of its South Africa rating to sub-investment grade. This would result in removal of local currency bonds from the WGBI and forced selling of an estimated $5-$10 billion.
Gramercy View: We remain skeptical of the government’s willingness and ability to deliver the fiscal adjustment necessary to put debt on a sustainable path and avoid a downgrade. While the budget may include some positive elements with prospects of wage freezes or reductions as well as some modest tax measures to boost revenues, bleak growth prospects, a continuously struggling Eskom, and challenging dynamics with unions will likely result in any fiscal effort falling short of reversing the debt trajectory, particularly in the near-term. As such, the rand and local rates remain subject to volatility over the medium-term.
Please contact our Co-Heads of Sovereign Research with any questions:
Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]
Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]
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