Sovereign Stress Tracker: Argentina's stunning turnaround

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The article below features full results for November 2024’s sovereign debt stress analysis for 44 emerging market countries, but I am only making these full results available in the article’s email version sent to subscribers and which will not be accessible via the article’s web version. Both versions feature a discussion of Argentina.

Argentina’s stunning turnaround

Comparing current and past results of my sovereign stress analysis using an IMF model, Argentina stands out as one of the most improved countries.

And certainly this is partly related to strong signals sent on the "General Government Debt, 1-Year Change" variable in both 2023 and 2024.

The IMF has stated that Argentine general government debt surged to above 155%/GDP in 2023 from around 84% in 2022 largely due to:

• A large nominal devaluation in December of that year (the same month as President Milei's inauguration)

• A 50% downward revision of nominal GDP

This of course sent a negative signal to the model, indicating a high likelihood of sovereign stress for Argentina in 2023.

And while Buenos Aires avoided default in 2023, its maturity-extending debt swaps and buybacks in 2022 and 2023 were symptomatic of those strains.

For 2024, the Milei administration's fiscal efforts are bringing general government debt down to 91%, sending a strong signal to this model of lower sovereign stress.

A strong fiscal path

Argentina has been performing well on a range of other indicators included in the model.

First and foremost, the current account has turned positive thanks to the December 2023 devaluation and the Milei administration achieving a budgetary surplus through end-September 2024.

The current account is the sum of public and private savings-investment balances.

Owing to real spending cuts of 26% y/y, the primary budget surplus stands at 1.7%, a remarkable public savings achievement.

This follows the previous administration running a large pre-electoral and pre-devaluation current account deficit in 2023.

The public debt-to-revenue ratio has declined significantly this year, from nearly 5x to just under 3x.

This lower ratio is entirely thanks to the large decrease in public debt, which has offset a real revenue decline of 8% y/y.

Moderating real exchange rate pressures

Last December’s devaluation and the cooling of this year’s inflation have begun feeding into the three-year change in the real effective exchange rate.

A sharp rise in this indicator is associated with episodes of sovereign stress.

As such, its decline to below 20% represents welcome relief, although this still-high level of growth compared to three years ago remains a risk.

Mind the credit gap!

Highly-positive credit gaps are also a source of risk for sovereign debt strains.

Too much lending to the private sector can contribute to economic overheating and financial instability.

Argentina’s credit-to-GDP gap, at around 3%, is the highest it has been since 2021 and is among the highest in its peer group - and thus a potential source of sovereign stress.