‘Massa Is Not Messi’; Argentina’s Bond Buyback An Unlikely Win, Goldman Sachs Says

Alberto Ramos, the US investment bank’s head of macroeconomic research for Latin America, tells Bloomberg Línea that Argentina’s economy minister is unlikely to score a win with his bond buyback plan

Alberto Ramos, head of the Latin America macroeconomic research team of the US investment bank Goldman Sachs, talks about Argentina's latest bid to manage its economic turmoil.
January 19, 2023 | 07:26 PM

Buenos Aires — Alberto Ramos, head of the Latin America macroeconomic research team of the US investment bank Goldman Sachs, tells Bloomberg Línea in an interview that the debt buyback announced Wednesday by Argentine Economy Minister Sergio Massa will not stop the climb of the parallel US dollar for long.

For Ramos, Massa probably announced the buyback in order to “reduce the gap between the official and unofficial exchange rates, because he knows that there is pressure in the foreign exchange market that filters into expectations and, ultimately, into inflation”.

However, in a context in which the central bank’s reserves are scarce, exchange rate pressure in Argentina will not ease until the government addresses its “underlying cause”, which is “the large fiscal deficits that have been recurrently monetized, the low credibility of policies and very, very high inflation”, Ramos said.

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Similarly, the Mozambique-born economist of Portuguese nationality also considered it “unlikely” that Massa will achieve his goal of Argentina returning to the capital markets “if its policies continue to be heterodox”.

Alberto Ramos. El director del equipo de investigación macroeconómica de Latinoamérica en Goldman Sachs.dfd

The following conversation was edited for length and clarity:

Bloomberg Línea: What is your assessment of Economy Minister Sergio Massa’s decision to buy back $1 billion of foreign debt, and what do you think his ultimate goal was?

Alberto Ramos: There are varying interpretations. It’s not clear. I mean, it’s a small amount. It’s $1 billion. You are basically repurchasing bonds that mature later in this decade. So it’s not something imminent in terms of debt servicing. And they’re using very scarce reserves at the central bank to do that. While at the same time, we have significant restrictions on access to foreign exchange by the central bank, including to finance critical imports into the economy. It seems the minister is trying to reduce the pressure on the unofficial exchange rate, you know, basically to reduce the gap between the official and the unofficial exchange rates, because he knows there is pressure in the foreign exchange market that filters into expectations and eventually into inflation. It seems to me that probably that’s more the rationale behind it, rather than a pure debt management operation.

Do you think this can be effective in keeping the parallel exchange rates down for a prolonged period of time?

No, and reason number one, because Argentina doesn’t have enough firepower to do so. They don’t have enough reserves to throw at this problem, basically by buying debt and injecting more dollars into the economy. It’s very, very limited. There is significant scarcity of reserves at the central bank. And there are a lot of other sources competing for those scarce dollars. The second reason is that debt does not really address the underlying cause of the pressure on the exchange rate, which has to do with large fiscal deficits that have been recurrently monetized, low policy credibility, and very, very high inflation. Until you address those fundamental causes of pressure on the exchange rate, I don’t think this is a remedy for that problem.

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How big of a risk do you see in the government’s peso-denominated debt, and the struggles to roll it over? Do you think that’s a major issue that the government will face for the rest of the year?

It’s a growing risk. Basically, the only market access that the government has at this stage is the local market, and they have to validate extraordinarily high interest rates. The stock of domestic debt is increasing very, very rapidly, and so is the debt service. So they need to come back to the market recurrently and for higher and higher amounts. It’s something that needs to be addressed. And again, we go back to the fundamental problem: fiscal deficits that are being monetized or funded in the local market, when the local market is not particularly deep, and the pool of domestic savings is also quite small. So this has macroeconomic consequences, and the rollover risk is certainly increasing at the moment.

Do you think that investors who are buying Argentine stocks or bonds might be overconfident regarding a better macroeconomic picture starting in 2024?

It’s hard to tell. I would not say that the market is necessarily overly confident. I think it’s a reflection of the global environment, to a certain extent. The fact that the IMF program remains on track, with some of the targets under the program met, but smaller ones. Argentine assets have also been rallying from very, very depressed valuations. So I would not necessarily translate that as a clear vote of confidence in the outlook for the economy or the policies in place.

Your base scenario for this year, as per your last report, is of 0% growth for the economy this year. What are the key variables that explain that stagnation this year?

Well, the 0% is probably on the optimistic side of the range, probably more bullish than the consensus. It’s a very low figure. It has to do with the fact that we’re going to have an environment of very high inflation, with low real disposable income, uncertainty related to the electoral process in the second half of the year, weaker impulse from global growth, and also, on the domestic side, the diminishing or fading impulse from the reopening of the economy to activity, and particularly the services sector. So we have a number of headwinds. All and the uncertainty that makes the domestic agents more defensive in their spending and investment decisions, which adds up to growth that is probably around 0%, with a significant probability that it is actually negative.

You forecast inflation at around 85% this year. The analysts that the central bank consults each month see it higher than in 2022, closer to 100%. Do you see a slowdown then in inflation?

We’re talking about very, very high numbers. At that level, it’s difficult to have a high degree of conviction about what inflation will be. The base effects are very, very high. The government will probably repress inflation as much as they can ahead of the election. So it all boils down to whether or not there’s a discrete one-off large devaluation after the elections, and nobody really has any visibility into that. How discrete and how early could it come? I would not necessarily bang the table and say, ‘I’m firmly behind our 85% inflation forecast’. There’s a lot of uncertainty around a number like that. What we have a strong conviction about is that inflation will remain very high throughout 2023, whether it is 85%, or 95%, or even 100%.

Do you think the exchange rate pressures that we’re seeing will be manageable in terms of staving off a sharp devaluation of the official exchange while this government is in charge?

Look, it’s increasingly difficult to do it. To avoid a large devaluation before the elections, you probably need to resort to increasing levels of financial repression. And we already have a lot of that. So it’s possible that things become unmanageable. There are unforeseen shocks where the authorities lose the grip on the process. But even if they succeed, the cost of doing so keeps on increasing because of the misallocation of resources that creates and the distortions that creates in the economy. It’s not an impossible task, but it’s an increasingly costly task.

Do you see Argentina’s debt maturities over the next few years, particularly starting in 2025, as sustainable or is there a chance of seeing another restructuring process?

The question depends on what the policies are. Argentina is not insolvent under a set of strong macroeconomic policies. If the macroeconomic policies on the ground, both monetary and fiscal, were to be strong, conventional, orthodox, then Argentina is solvent. And under that policy mix, Argentina will regain market access. And they could navigate those amortizations that will come up. If the policies remain heterodox, somewhat dysfunctional, we see inflation continue to accelerate, and the number of distortions in the economy continue to grow, then that question becomes a valid one. Whether or not that restructuring operation will be needed. So really it’s conditional on the policies that will be implemented over the next two or three years, and particularly whether this administration is elected or a new administration comes in and implements different policies. In absolute terms, it’s not unsustainable. But it’s a big question mark there.

You mentioned in your recent report that Massa isn’t Messi. With his announcement on Wednesday, Massa mentioned that his objective with the buyback is to bring Argentina back to the capital markets. Do you see that as being realistic or even possible before December 2023?

Under these policies, probably unlikely. If the policies improve throughout the year, under the guidance of the IMF, it’s not an impossible dream. I mean, Messi is brilliant. There are no two Messis. So it’s not even a fair comparison. But under these policies, to regain market access, I think, would be akin to Messi winning the World Cup, something that is difficult, and which requires extreme skill and talent, and a good team around you to do it. So let’s see.