Argentina elected left-leaning Alberto Fernandez as its president last Sunday, defeating President Macri by 48% to 40%. Argentina’s agriculture industry is its biggest driver of USD-denominated exports and therefore USD-deonominated treasury receipts Argentina can use to repay its international debt. Thus the agriculture sector’s sustainability is a key source of USD to fight off Argentina’s pending default, which President-elect Fernandez must address immediately. And since 2016 (see Figure 1), Argentina has increasingly used soybean exports to grow its USD-denominated tax base with soybean and soybean product export tax rates ranging from 24% to 29% of every dollar exported. Argentinian soybeans pay for its sovereign bonds yet soybean exports markets are increasingly seeing higher barriers to entry over deforestation.
Figure 1: Argentina Tax Revenue vs Economic Activity vs. Daily Soybean Exports August 2016–August 2019. Source: Bloomberg, L.P. 2019.
After Fernandez’ August 2019 primary win, Fitch Ratings, Moody’s and Standard & Poor’s downgraded Argentinian debt to a very high risk of default within the next presidential term at CC, Caa2, and CCC- respectively. Argentina’s current 5-year credit default probability is now over 94%. Argentinian sovereign bonds currently trade at 40 cents on the dollar.
Argentina soybean product and debt
The new Argentinian government needs to renegotiate and restructure. It wants to renegotiate $30 billion of its USD-bonds and has stated it wants to renegotate via extending the bonds’ term and delaying interest payments. Fernandez also wants to restructure $101 billion in debt including the $56.3 billion IMF Stand-By Agreement facility due June 2021.
In mid-October 2019, the IMF’s Managing Director, Kristalina Georgieva, stated that the IMF will now integrate climate risk into financial assessments of high-risk countries. This means that the IMF now has a second chance to address Argentina’s climate-related deforestation-linked agriculture production in its analysis.
But Argentina’s external debt and its external-debt-to-GDP ratio have increased from $237 billion (37%) to $286 billion (60%) since 2017. Argentina’s inflation in September grew to 5.9% month-over-month and since September 2018, its inflation has been 53.5%. And Argentina’s last six quarters have been in recession and its latest 12-month GDP was negative at -3.7%.
How bank policy pays into soybean products
After the election, the Banco Central de la República Argentina imposed rigorous capital controls to mitigate capital flight by decreasing dollar purchasing limits from $10,000 a month to $200 a month. The central bank has spent $22 billion since August 11, leaving its reserves now at $43.5 billion. In H1 2019, the depreciating Argentinian Peso and the stagnant recession narrowed Argentina’s current account deficit, delivering a surplus to Argentina’s overall negative GDP compared to a deficit in H1 2018.
World Bank Sovereign ESG Data Portal reports that Argentina’s Agriculture, Forestry and Fishing sector added from 4.5% to 10.3% to Argentinian GDP between 1991 and 2017.
In June 2019 Mercosur – the Southern Common Market, established in 1994, whose full members are Argentina, Brazil, Paraguay, and Uruguay – and the European Union agreed on a trade deal. This is good news for Argentina yet all parties need to ratify the agreement.
But the key issue is that the last time Argentina defaulted in 2001, the GDP contribution from Agriculture, Forestry, and Fishing spiked 120% the following year from 4.6% to 10.2% and Argentina’s net forest deplation also spiked. The problem with clearcutting forests to obtain USD-denominated treasury receipts is that this then can have negative impacts increasing short-term flood and drought risks. In 2017/18, Argentina agriculture-based economy lost about $8 billion from drought and flood alone.[i]
From 2008 to 2017, Argentina’s soybean and soybean product exports are estimated at $180 billion[ii] or about one-quarter of Argentina’s total exports. Now African Swine Flu in China is decreasing demand for Argentinian soy. In 2018, 97% of Argentina’s whole raw soybean exports went to China while China’s interest in Argentina’s Vaca Muerta natural gas fields, which the Energy Information Agency considers to be the second largest natural gas play in the world, after Eagle Ford in the U.S., is growing.
Next, the EU passed its Renewable Energy Directive II in December 2018, which would decrease Argentina’s deforestation-linked soybean product exports to the EU over time to zero beginning in 2023.[iii] The EU is also moving forward with its EU Action on Deforestation and Forest Degradation,[iv] exclude deforestation-linked agriculture commodities. These commodities matter to investors because from 2008 to 2017, Argentina suffered an estimated 3 million hectares of tree cover loss, equal to the size of Belgium, in the environmentally sensitive Dry Gran Chaco region.[v]
Finally, Argentina’s Instituto Nacional de Estadística y Censos reported that Argentina’s non-seasonally adjusted agriculture contribution to GDP growth rate between Q2 2017 and Q2 2018 was almost 50% down year-on-year.[vi] This decrease occurred because of severe drought the country experienced in 2017/18 that caused up to $8 billion in economic damage.
So if Argentina is looking for lessons learned to make wiser decisions during this round of sovereign default, one can only hope that the country can make better choices and migrate its agriculture production towards sustainability that markets demand.[vii]
Article By Matt McLuckie, Director of Research, Planet Tracker and Gabriel Thoumi, CFA, FRM, Director of Financial Markets, Planet Tracker
[i] World Bank Sovereign ESG Data Portal (launched October 29, 2019).
[ii] Observatory of Economic Complexity, MIT and Instituto Nacional de Estadística y Censo (2019).
[iii] European Commission (13 March 2019). Commission delegated regulation of 13.3.2019 supplementing Directive (EU) 2018/2001 as regards the determination of high indirect land-use change-risk feedstock for which a significant expansion of the production area into land with high carbon stock is observed and the certification of low indirect landuse change-risk biofuels, bioliquids and biomass fuels.
[iv] European Commission (18 December 2018). European Commission (2018). Deforestation and forest degradation – stepping up EU action.
[v] Global Forest Watch data and Planet Tracker analysis (2019).
[vi] Instituto Nacional de Estadística y Censos and Bloomberg L.P. (2019).
[vii] World Bank Sovereign ESG Data Portal (launched October 29, 2019).