Featuring: Argentina | ECUADOR

This week we comment on the latest developments with Argentina’s ongoing debt restructuring as well as Ecuador’s constructive fiscal measures.

Argentina extends deadline to June 2nd for further creditor negotiations; March economic activity plummeted as expected  

Market Relevance: The government’s external bond restructuring proposal, as well as its grace period on external bond coupon payments, expired on May 22nd. Negotiations are set to continue, despite lack of payment and failure to reach an agreement. The next large foreign law debt obligations are due at the end of June ($566mm) with a grace period through July 30th. The IMF stated that it is encouraged by the willingness of Argentina and its creditors to continue dialogue and affirmed that the authorities’ intentions are to complete an Article IV assessment prior to starting any program discussions with no details on timeline. Meanwhile, monthly economic activity in March collapsed by 11.5% YoY as the nationwide lockdown went into effect the third week of the month.

Gramercy View: The lack of a deal is not surprising, given the narrow timeframe provided for bondholder discussions, large gap between offers, and complicated inter-creditor dynamics. Willingness to continue talks is promising albeit the aforementioned challenges still pose headwinds to a swift agreement, particularly one that has a high participation rate. Efforts among creditors to coalesce around an acceptable solution are expected to continue while the government should work to amend its terms in the context of a sustainable resolution. These are not mutually exclusive in our view and incentives for a deal persist as reflected by recent signals of flexibility, such as Argentina’s open request for a counterproposal and the subsequent response from creditor groups, albeit marginal, on both sides. We anticipate data releases to disappoint through April and May with focus on tracking high frequency indicators amid any gradual reopening in the coming months. Political tensions over recent relaxation measures combined with a continued rise in new daily COVID-19 cases will likely limit the speed and degree of a return to normalcy with the government extending the lockdown until June 8th this past week. While there should be some eventual improvement as a result of incremental resumption of daily activity, any recovery will likely face headwinds from uncertainty regarding the debt situation and the COVID-19 pandemic, as well as increasingly interventionist policies.

Ecuador eliminated fuel subsidies and announced ambitious budget expenditure cuts to cope with fiscal shortfall due to economic and oil price shocks       

Market Relevance: In its efforts to manage the fiscal fallout from the ongoing dual shock of sudden stop in economic activity and collapse in oil prices, Ecuador’s government announced the elimination of fuel subsidies as well as additional expenditure cuts targeting budget savings of around $4bn this year.

Gramercy View: The actions taken by the Ecuadorian authorities this week are meaningful for markets from a couple of different perspectives. The measures approved by the National Assembly to lower fiscal spending by around $4bn amount to around 15% of the original 2020 budgeted government expenditure. Although some of the savings in the package might not materialize in the full size envisioned by the authorities, the initiative sends a clear and strong signal about the Moreno Administration’s commitment to maintaining fiscal discipline ahead of critically important negotiations with the IMF over securing a successor assistance program by June/July and with bondholders over external debt re-profiling. Also, the action indicates that the government has been able to preserve governability even in the face of the severe COVID-19 humanitarian and economic crisis. The elimination of fuel subsidies, also announced this week, is another important development. Addressing this issue has been described by the IMF as one of the most impactful structural reforms from both a public finance and economic liberalization point of view. As a reminder, it was precisely the attempt by the authorities to do so that triggered violent street protests in October 2019 forcing the Moreno Administration to backtrack on the reform then. With oil prices still near historic lows, the government has taken advantage to reintroduce this major reform with minimal social fallout risk, given that consumers will not notice any impact at the pump until a material recovery in oil prices takes hold (which would be positive for Ecuador at a macro level). The budget costs associated with fuel subsidies have been approximately 2% of GDP (around $2bn) annually so their elimination has the potential to catalyze a significant structural improvement in the fiscal position.

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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