Majority of Relative Price Adjustments Are Complete in Argentina, Says Former Finance Secretary

The Javier Milei administration should muster a return to international debt markets in 2025, Daniel Marx, executive director of Quantum Finanzas, told Bloomberg Línea in an interview

Cuándo podría volver a emitir deuda Argentina y el envión al salir del cepo, según Daniel Marx
22 de mayo, 2024 | 02:53 PM

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Buenos Aires — In episode 601 of Bloomberg Línea’s podcast, La Estrategia del Día Argentina, Francisco Aldaya spoke with Daniel Marx, executive director of the financial advisory firm focused on Argentina and Latin America, Quantum Finanzas. Marx was a director at the Central Bank of the Argentine Republic and worked at the Economy Ministry during the presidencies of Raúl Alfonsín, Carlos Menem, and Fernando de la Rúa.

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I believe that in terms of numbers and maturities, Argentina should be re-entering the international and public markets sometime in 2025.

Daniel Marx, Quantum Finanzas

Bloomberg Línea: What lessons did your experiences as Director of the Central Bank, Special Financial Representative, Chief Debt Negotiator, and Secretary of Finance during two of Argentina’s main economic crises, 1989 and 2001, leave you? Especially considering the insights that could be useful to the current economic management, which still has imbalances to resolve.

Daniel Marx: I was at the Central Bank until ‘88, and then I dealt with debt issues until ‘93. Several things always need to align to achieve greater economic activity, a better investment climate, and substantially lower inflation. I would start with governance. When there is a lot of discrepancy, and it is difficult for individuals and companies to estimate the future, activity and confidence in general decline. This leads to a strong depreciation of the currency and an increase in the inflation rate. So, what guidelines will govern the public and private sectors? How does the private sector, within these guidelines, see opportunities to develop resources efficiently and competitively, and consequently also stabilize and achieve forward growth? Then there are a series of instrumental issues related to this, covering fiscal and monetary accounts, exchange rate policy, and so-called structural reforms. It is difficult to think of an isolated component that provides almost magical solutions.

From your experience during the convertibility period, what do you think of the Government’s goal of eventually closing the Central Bank and dollarizing, as part of a framework to promote the continuity of public and economic policies?

Argentina is a medium-sized country with relatively little trade with the United States. So, it seems to me that Argentina should seek to have a more autonomous monetary policy. A fundamental preliminary step is to give credibility to the peso. The Central Bank’s role is related to defending the peso as a unit of account, store of value, and transaction currency. Therefore, if there is competition among currencies, I think it is good, because economies have different degrees of openness, and generally, the more open they are, the more long-term growth they achieve. This must be done intelligently in a turbulent world. Even in countries that do not use their own currency, such as those in the eurozone, they retained the Central Bank with a supervisory role over the financial system. Here, it seems to me that closing the Central Bank... one way or another, apart from defending the peso, there is the function of achieving some general financial stability, and someone will have to take on that role.


But do you think the argument of dollarization as a tool to limit the actions of potentially irresponsible monetary and fiscal governments is solid?

That argument must be validated with a situation on the fiscal front, on the structural front, that makes it compatible and stable, apart from the issue of whether or not to peg the peso to the dollar, which is a strategic discussion we just mentioned. But we must think precisely about how financial stabilization is achieved. There are countries that dollarized and achieved initial credibility for the monetary authority. There’s the case of Ecuador and the case of Zimbabwe. Ecuador remains dollarized and has had some growth in the banking system, and it also maintains the Central Bank. But Zimbabwe had to abandon dollarization, generating a subsequent substantial crisis. Macroeconomic balances must also be considered. Other countries retained their currencies with an open system and generally, if they were able to make the entire macroeconomic system compatible, they achieved a significant increase in credit and the use of the local currency. This without the Central Bank financing the government, but it does make the system re-monetize, and by re-monetizing, reactivate the economy and stabilize prices.

Miguel Kiguel said last week that he saw a return to the international debt market during this government as doable. If that were to happen, what advice would you give the current administration regarding debt management?

I believe that in terms of numbers and maturities, Argentina should be re-entering the international and public markets sometime in 2025.

Foto: Marcelo Del Arco.

In 2025, there’s a grace year with the IMF.

Yes, regarding the capital payments, but that’s why we have to prepare for it, and there are foreign currency maturities for the public sector, apart from what multilateral creditors may be. This is growing, but it seems there is time, although it cannot be achieved overnight. The conditions depend on how Argentina is functioning, how it is perceived at that time, and to be perceived favorably, it is necessary to demonstrate, not just think about promises. A track record helps and all the other elements we mentioned, so it is not seen as a circumstantial improvement, but rather as an improvement with a much deeper foundation.


What scenario do you foresee specifically for the two main bonds maturing in the short term, which are GD30 and AL30?

I believe that the maturities of those bonds and others are quite manageable given the overall figures. I don’t see Argentina having problems attending to the services of those bonds and the others,

¿Rollover, without any surprises?

Yes, as long as, of course, the conditions we talked about earlier are met.

When your clients ask about the political scenario, with the noise we are seeing around the Bases Law and the fiscal package in the Senate, what kind of answers do you give regarding how this could be organized?

I believe that Argentina, as a whole, has decided to improve. This means addressing the imbalances that had previously accumulated and somehow adapting to seek greater stability, efficiency, and competitiveness. There are different ways to achieve this. It is probably not a straight line, where each and every thing happens without shocks, but this should be beyond individuals. The decision is more from the population than from individuals. And individuals, of course with their responsibilities, have to find how to implement them. The answer I give is that the population has marked a course, and individuals have the obligation or responsibility to make it happen. And if not, well, we will have the natural functioning issues of a democracy; hopefully, it will be as smooth as possible.

Part of the equation of whether it will work or not, whether it will succeed in the political system’s organization, has to do with how much people can continue to tolerate the ongoing adjustment. What percentage of the relative price adjustment do you think has been completed in Argentina?

To date, a percentage... if I had to put a number, around 70% in relative prices. It is not complete, but a good part is done.

And in that context, is it more understandable and feasible for the government to postpone what is left to adjust in tariffs? Or is there a risk there?

Precisely, we need to see how this aligns with the economic activity prospects. Another thing related to tariffs is the fulfillment of contracts. It seems that care should be taken now.

For example, the situation around Cammesa’s debt with electricity and gas companies?

Yes, yes. Well, how is that going to be resolved? And will they show that, in the future, everything will be fulfilled as planned, at least?

And in terms of inflation, is there a risk there too eventually, when the remaining adjustments are made?

There is a risk. As we said, it is not complete, and there is the issue of how much of this the population can absorb. Economic policy is some sort of compensation or choice. There are always costs. And yes, there is some inflation that has not yet materialized.


How much has the Central Bank’s balance sheet improved since Milei took office?

It has improved substantially. The figure could be several tens of billions of dollars equivalent. I am not saying the cleanup is complete. For central banks, part of it is the numbers shown in equity, but much more has to do with their credibility and consistency. Fulfilling their specific functions and demonstrating it over time. This is something that also needs to be taken care of, beyond just looking at the numbers.

Daniel Marx

Providing predictability to agents, and organizing even before the Central Bank takes certain actions.

Yes, and trusting the Central Bank as the custodian of the currency, with everything that maintaining a currency means.

Part of the complexity of understanding Argentina lies in the validity of exchange controls and regulations around import payments. How much distortion do they create in Argentina’s financial situation, from reserve accumulation, exchange rate stability, and debt issuance by companies?

It has its effects. For example, in the liquidation of foreign exchange by exporters, where there are now doubts about the commercialization of the ongoing harvest. The same applies to some importers’ demand for the payment of certain services. Some accumulated and others that may come in the future. And the movements of capital, which are not receiving enough attention. In the past, Argentina has had many years of trade surplus and lack of foreign exchange simultaneously. And this is due to capital movements. People not trusting the peso, trying to exit the Argentine risk. It is important to reverse this. And that contributes to how the exchange controls are lifted, under what circumstances, and when. But maintaining the controls today generates distortions, not only commercially but also in these capital movements.

A Wall Street banker recently told Bloomberg News that, in his view, the government underestimates the inflow of foreign exchange, of capital, that it could receive by lifting the controls. Do you see this more on the financial side, or could it also happen in terms of investments for the real economy?

Yes, I think it also has positive effects on the real economy. As the Central Bank reinforces its credibility, as Argentina institutionally supports it, gives it that mission, evaluates its responsibility, and this means faster accumulation of reserves. These accumulated reserves must be reflected in the remonetization of the economy, and the remonetization of the economy is a factor of economic reactivation.


Still, you recently said you do not see a “V” rebound in activity. Is that discounting a scenario of a successful exit from the controls?

When one anticipates, it has to do not with what one thinks would be good to do, but also what one thinks will be done. And there, it seems to me that the exit from the controls, orderly and accompanied by these other elements, would help to have a faster recovery.

Unemployment was a big issue in the ‘90s. Which sectors should Argentina strategically bet on to sustain employment in the coming years?

It is important to think that the State is not omnipotent in selecting sectors. In general, sometimes it does well, sometimes it does poorly there, but it means that the State, if it does so, must be extremely careful with the resources it dedicates because they are public resources. Many say, well, Argentina has competitive advantages in certain sectors. Some are more primary than less primary. Argentina has a human capital that is a very strong resource that needs to be further developed, which aligns not only competitiveness but also much more qualified and well-paid labor. So, some of these resources may go to primary-primary, some to the processing of primary goods, and some may be pure services. There should be rules of the game that allow them to develop, much more than putting the finger on one sector or another.


Can the unemployment rate become a problem for Milei?

Argentina has to transition several companies, more than branches of activity. It has to become more productive, more efficient. This generally has effects on employment. But the key is to reactivate and provide new opportunities that facilitate the transition from the old to the new, as it needs to be replaced. But replacing is not everything, and often it is making what already exists more efficient. This is a constant struggle, but there is the potential problem of not transitioning well and falling into a trap of increasing unemployment.

And how do you think Argentine wages could evolve in the next 12 months?

If this system of monetary, fiscal, exchange, and structural compatibility is successful, it seems to me that wages should generally rise. Of course, some will benefit more and others much less. But Argentina is starting from a level of wages that is generally quite low. Conditions are in place for them to rise, but of course, they must be implemented.

In what types of Argentine assets are you seeing opportunities today at Quantum Finanzas?

If Argentina follows a path of normalization, sovereign bonds in foreign currency could continue to rise in price. Not all the catch-up has been done. How much could they rise? It depends on the bond, but above 20%. I am not saying it is instantaneous, but it will take time. And the requirement is that the rest accompanies, the fundamentals. It is not about setting a price and saying everything must accommodate to that price, but the opposite. Things must accommodate to reach that price. Then we see some specific cases. I believe there are companies that will even be planning some debt issuances on relatively good projects. And this merits special, generally structured financing, where there is a fixed component and perhaps some variable component. Again, based on Argentina normalizing and this company being able to move forward with those projects.

You were part of two UCR governments and one Peronist administration. What kind of institutions do you think were lacking in Argentina or are still lacking in Argentina to achieve the continuity in public policies that countries like Chile, Peru, and Uruguay have achieved? Or is it more of a cultural problem?

It is important to have codes of conduct for public officials, both on the ethical and professional sides. And it seems to me that in this, there are roles that public officials must fulfill and roles that they should not. But I place this in the codes. It is important to have good professional and ethical selection. And to give that stability, a career development within these frameworks for the various organs of the public sector.