The primary election (PASO) results unleashed a tumultuous week for Argentina, with the currency plunging, S&P and Fitch cutting their credit ratings, and the Finance Minister resigning. This has raised the spectre of possible defaults under a theoretical (but highly possible) victory of Alberto Fernandez as President and Cristina Fernandez de Kirchner as Vice-President in October.
With the economy in disarray and so much uncertainty regarding where the markets will go, which Argentinian corporates are most likely to default?
We think that the fear of a return to populist Kirchnerism policies is likely to affect Argentina’s four main Independent Power Producers (IPPs): Stoneway, Albanesi, Genneia and MSU Energy. These four IPPs have thrived on the back of their dollar-linked contracts and on the clean-up of the country’s government-owned energy, power wholesale and dispatch company CAMMESA. We also see Pampa Energia as being vulnerable to adverse energy policies.
For YPF SA, perhaps the strongest company in Argentina given its importance for the economy (it is the one corporate in Argentina that could be deemed a quasi-sovereign), there’s the dread of another spectre: the nationalisation of YPF’s Spanish-owned part of the company (Repsol) by Cristina Kirchner, and the messy and lengthy compensation process that followed.
We believe that banks could also be hard hit, as the central bank has limited measures to stop a run on the peso, as we have already witnessed. We highlight the country’s two largest banks: Grupo Financiero Galicia (and its subsidiaries Banco de Galicia y Buenos Aires, Tarjeta Naranja, and others) and Banco Macro. While these banks have consolidated the market, remain well-capitalised and dominate the sector in the country, their holdings in government paper and the (likely) continuing shrinkage of the economy is a toxic formula, regardless of how strong they may be today. This is particularly so in the absence of a strong foreign “parent” that could bail them out.
Of course, it is reasonable to assume that the smaller, weaker companies and provinces would be the first to potentially default, especially those with debt falling due soon that they cannot refinance. But if the crisis reaches a level similar to the one that took place two decades ago, we can safely assume that even stronger companies will be at risk. This is because previous Kirchner experiences are enough to spook even the most optimistic investor.
Regardless, much will depend on what the new government will want/be able to do with the country’s heavy debt burden, inflation, rates, growth and overall economy. This holds true whether the next government is formed by the Fernandez-Fernandez ticket or if Mauricio Macri can pull a second term out of the proverbial hat.