Argentina at Mercy of Debt Markets to Fund Reforms, Macri Says

(Bloomberg) -- Argentina’s ambitious reform plans will be vulnerable to global debt markets in the coming years, said President Mauricio Macri, who gave his clearest indication yet that he will seek a second term to fulfill them.

Macri said in an interview with Bloomberg News on Tuesday that it will take time to lower double-digit inflation and to cut labor costs that have kept real-economy investors at bay. Meanwhile, he must borrow to plug inherited deficits. S&P Global Ratings on Nov. 6 included Argentina among a list of five countries that would be most endangered if financial conditions deteriorate, along with Turkey, Pakistan, Egypt and Qatar.

Macri acknowledged the country’s precarious position.

“We are vulnerable, because we need financing; arguing against that is stupid,” Macri said. However, “we have the best potential, compared with all the others. I am ready to continue if the citizens indicate that they want me to continue running the country.”

Macri, 58, was in New York to speak with investors as he embarks on a second wave of reforms after his center-right Cambiemos alliance won a clear endorsement in legislative elections last month. He said Argentina’s possibilities outweigh its risks, citing plans to double food production in the next four years and the potential of producing renewable energy and shale gas.

Cambiemos Ascendant

Argentina will issue about $30 billion in net debt next year, with the goal of selling about half internationally and the rest locally, said Finance Minister Luis Caputo, who accompanied the president. Only about 20 percent of Argentina’s debt is denominated in pesos, according to data compiled by Bloomberg, which leaves it at the mercy of volatility in global currency markets.

Still, the nation of 44 million, South America’s second-biggest economy, is on something of a roll. Yields on the nation’s bonds fell as much as 130 basis points this year to a record low and S&P raised the credit rating one level for the sovereign debt. The yield on the nation’s debt due in 2033 rose 2 basis points to 6.26 percent at 7:58 a.m. in New York.

Optimism has soared after Cambiemos’ electoral success, according to opinion surveys, and Macri’s approval rating has risen to 47 percent, among the highest in Latin America. The economy continues to post encouraging figures as it accelerates out of last year’s recession. And Macri’s infrastructure projects are driving the construction industry as investment and private consumption start to pick up.

Reducing inflation and cutting the fiscal deficit remain Macri’s main economic objectives. On Tuesday, the central bank unexpectedly raised borrowing costs for the second time in less than a month, pushing up the key rate by a full percentage point as the nation tries to combat inflation.

Macri said he expects inflation to slow to 15 percent by the end of 2018, missing the bank’s target range of 8 percent to 12 percent. He said he sees salary increase negotiations with unions for next year ending “a bit lower” than 15 percent.

Old Friends

Looking outside the nation’s borders, Macri has sought to draw upon a relationship with U.S. President Donald Trump that dates back to the 1980s, when they worked together on potential real-estate projects in New York. The connection has yielded mixed results.

Argentine officials traveled last week to Washington to negotiate with the Commerce Department after the U.S. said it would impose duties of 70 percent on Argentine biodiesel imports worth about $1.2 billion. Argentina would be willing to apply an export tax of 15 percent and might also accept a quota to satisfy U.S. producers that brought a dumping complaint, Macri said.

“I am fortunate, because I have known Donald since I was 24 years old and that gives us a chance to communicate and talk in a very straight and clear way,” said Macri, who has spoken several times to Trump since his election. “We are ready to tax our exports of biodiesel as we are taxing our soy exports, which are the only ones that remain with this stupid export tax.”

Exports remain an area of frustration for the president. Macri said the Mercosur trade group, which includes Brazil, Paraguay and Uruguay, likely will sign a free-trade agreement with the European Union by year-end. But he said Argentina is frustrated by Mercosur’s lack of progress striking such deals.

“We are not happy at all,” Macri said “We have to be more dynamic with Mercosur, inside Mercosur and with the rest of the blocs.”

So Macri is left to consolidate domestic victories and build momentum before the 2019 presidential election. A week after the legislative votes last month, he summoned political, business and union leaders to Buenos Aires to present plans for the new wave of reforms. He has drafted bills to reduce labor costs, streamline a costly pension system and reform the public prosecutor’s office.

“We are finding very good agreements on this basic consensus, and I expect that we will sign all these new laws and approve them before the end of the year,” he said. “That will give an extra clarity to foreign investors that Argentina is by far the best place you can invest in in the near future.”

--With assistance from Jose Enrique Arrioja

To contact the reporters on this story: Charlie Devereux in New York at cdevereux3@bloomberg.net, Andres R. Martinez in Buenos Aires at amartinez28@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Stephen Merelman

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