Debt restructuring is crucial for Argentina’s hydrocarbons sector

Activity in Argentina’s hydrocarbons sector depends heavily on the national government's success at striking a deal with its creditors to restructure the foreign debt.

As the IMF (Argentina’s biggest institutional lender) visits the country to receive a briefing on the Fernández administration’s economic plan, the eyes of several industries are set on the negotiations.

The debt has become so dominant that it even overtook plans for a law to spur interest in the country’s hydrocarbons sector. The original plan was to present a bill in March, but authorities are now suggesting it could be discussed in June or even later, as they don't see much value in any debate before the debt problem is solved.

Restructuring has turned more contentious after Buenos Aires province failed to secure the cooperation of its bondholders to restructure US$250mn earlier this month. Finance minister Martín Guzmán also switched his rhetoric to a more combative tone in his address to congress on Wednesday.

This suggests the government is expecting a longer negotiation and is hardening its stance to increase its leverage with potentially uncooperative creditors. As result of that uncertainty, the economy could remain in recession for many more months.

Political risk consultancy Verisk Maplecroft puts that likelihood at over 70%, up from around 67% in October last year. The main risk factor is diminishing time to reach an agreement, as the government's original timeframe was considered too short for a restructuring of this scale in the first place.

The debt negotiations affect the country’s hydrocarbons sector in two key ways: for international companies, capital controls mean they would seek other markets for investments. And the controls will only be lifted after the economy starts growing - which is not likely to happen until a successful restructuring takes place.

For national companies, the possibility of a sovereign default means they have only limited opportunity to take reasonable loans. A longer recession also increases the risk the government will tamper with fuel prices, dragging down profit margins and creating more financial troubles, similar to what happened in 3Q19.

Both developments point to subdued investment for the sector this year, which was already reflected in a sharp decline in spudding activity in the last two months of 2019. According to local press, the decline persisted in January. It should continue until companies have a clearer picture of what is to come.

A major effect of the crisis will be that large-scale players are likely to reduce their planned investments this year, impacting the whole chain of production. NOC YPF, the largest company in the sector, is expected to cut investments by about US$1bn so it can honor its debt maturities without the possibility of refinancing, as BNamericas reported previously.

GUZMÁN'S ADDRESS TO CONGRESS

According to Jimena Blanco, a political risk analyst at Verisk Maplecroft, the IMF’s position in the debt negotiations is delicate, as any direct admission by the fund that Argentina's debt is unsustainable would undermine bondholder interests by tacitly endorsing major haircuts on their payments.

A key pressure any government faces from its creditors is that of fiscal austerity: creditors want both an assurance that funds will be available to pay them back and also a sign of effort from a country that is asking them to shoulder losses through haircuts. The IMF is likely to support austerity measures, as it has in the past.

While finance minister Guzmán had been unclear about austerity in previous public appearances, in his latest address he clarified the government’s stance. “There is no worse option than austerity during a recession,” he said.

“There is a lot of money involved and people [creditors] are playing very rough…we will all need to decide on which side we stand: and we are on the side of the people,” added Guzmán before the legislative chamber.

He also rejected the possibility of Argentina abolishing its primary fiscal deficit. “If we had to pay our 2020, 2021, 2022 commitments as they stand, the resulting fiscal adjustment would completely destroy the [Argentine] economy,” he said.

“The situation is very tough. If we did nothing and let things play out by themselves, we could have a fiscal balance no earlier than 2026,” the minister said, which precludes any form of debt restructuring.

This year, he said, a reduction of the fiscal deficit would not be sustainable. The government’s plan would instead aim to create a balance by 2023 to avoid deepening the recession with an ill-timed fiscal tightening. If the economy were to recover and grow at 2% per year, this would allow for a fiscal surplus of 1% of GDP by 2026 through some more conservative budget cuts.

A reasonable and sustainable (albeit less optimistic) forecast would also allow the country, according to Guzmán, to issue bonds at more reasonable interest rates than the 7% average coupon rate offered to Argentina over the last few years. He also admitted this scenario will “elicit frustration” among bondholders, even though he sees it as the country’s only realistic option.

“We are not going to allow foreign investment funds to set our macroeconomic policy framework,” Guzmán said.