October 28, 2019 / 10:10 AM / 15 days ago

Argentine president elect faces full in-tray of economic woes

BUENOS AIRES (Reuters) - Alberto Fernández already has a full in-tray of economic woes to solve when he takes office in December. The country is grappling with recession, the peso is being caged by currency controls and a pile of debt repayments looms ominously on the horizon.

FILE PHOTO: Presidential candidate Alberto Fernandez celebrates after election results in Buenos Aires, Argentina October 27, 2019. REUTERS/Agustin Marcarian/File Photo

The center-left Peronist, who beat conservative incumbent Mauricio Macri on Sunday, will take on the top job from Dec. 10, with a juggling act to solve thorny issues like poverty while keeping the economy on track and fending off angry creditors.

“Now the campaign is over, Alberto Fernandez is going to need to start fixing the economy,” said Mariano Sardans, executive president of wealth manager FDI in Buenos Aires, adding the president elect’s comments would be key for markets.

EXCHANGE RATE

During the almost four years of under Macri, the peso currency ARS=RASL has devalued around 85%, which stoked inflation, running at an annual rate of more than 50%.

The primary election in August - which Fernandez won by a landslide - triggered a sell-off that dented savers’ confidence in the currency further and drained reserves as the central bank defended the peso.

Macri imposed capital controls to help cage the wobbly currency, but in the last week alone some $1.6 billion of reserves has been burned through to halt the peso’s fall.

The black market trade of dollars has also separated sharply from the official rate, creating dual markets as people look for other channels and lose faith in the formal price.

Fernandez will need to decide whether to loosen controls once more - and risk a peso fall - or tighten them further.

“I don’t see the central bank continuing to sell at this pace or allowing the exchange rate to go up more, which speeds up inflation,” said Martin Vauthier, an economist at Eco Go in Buenos Aires.

“A third option is a more rigid exchange scheme; they could eventually opt for this.”

(Graphic: Dollar drain - here)

FISCAL DEFICIT

Argentina struck a $57 billion financing deal with the International Monetary Fund in 2018, pledging to reach a primary fiscal balance in 2019 and a surplus of 1% of GDP in 2020.

The economic malaise has hit tax collection and rising costs on public budgets from inflation are putting the country’s fiscal goals - key to its relationship with the IMF - at risk.

Fernandez has also suggested he will help Argentines struggling with costs more, including lowering tariffs, increasing pensions and helping with free medication for retirees - all which will strain the public purse.

(Graphic: Fiscal pressure - here)

BONDS THAT TIE

Argentina is facing a rising mountain of debts, with a sharp jump in repayments due next year that will strain the new government’s ability to pay. Argentine officials are set for tough negotiations with creditors to restructure.

A Deutsche Bank report last month showed debt repayments rising to $26.5 billion next year, adding the “liquidity situation suggests to us that a debt default in 2020 will be very hard to avoid.”

Fernandez said last month that the country just needed more time and could avoid steep losses on its debt for creditors. “We will push back obligations over time so they rise in a more benign way, not exponentially,” Fernandez said.

Among Fernández’s advisers is Guillermo Nielsen, a former finance minister who carried out the debt restructuring of 2005, when the country agreed with 76% of the large bondholders to restructure some $100 billion in defaulted debt since 2001.

Government data show the country’s total debt totaled $310.8 billion at the end of September, 68% of the GDP.

(Graphic: Debt mountain - here)

RECESSION

The economy fell into the red in the second quarter of 2018, hit by a hard drought and doubts about the country’s financial position. This sparked a devaluation in the peso and a significant rise in interest rates to prop up the currency.

While edging out of recession in the second quarter of the year, the outlook has since darkened and the country’s economy is expected to shrink 2.9% this year and drop again in 2020.

Fernandez has criticized the high interest rates - which have stymied growth by choking off access to credit for many. “The first thing we have to do is promote consumption and also become exporters again,” he said during the election campaign.

(Graphic: Growing pains - here)

Reporting by Eliana Raszewski; Editing by Adam Jourdan and Daniel Wallis

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