Jorge Piedrahita: “The IMF will not validate Guzmán’s crazy ideas”
He studied Business Administration at the UBA and did a master’s degree in Finance at the University of Pennsylvania. He was Head Sovereign Trading at Citibank and Director of Securitization at Ford. He led Torino Capital for six years, until he joined Macrosynergy as a consultant. Since 2018 he is CEO of Gear Capital Partners
Jorge Piedrahita has lived in New York since 1994. There he specialized in analyzing the sustainability of sovereign debts and in strategic positioning in restructuring processes. The situations that he analyzed the most were those of Argentina, Venezuela and Ecuador.
– How do you see Argentina?
–The economy has been stagnating for 10 years if we look at the latest measurements of GDP in real terms. That is clearly a problem. The origin is multiple. On the one hand, Argentina has traditionally been a country with a low level of investment. To grow, you need investment. In the last 10 years there have been several cycles, the end of Kirchnerism, the euphoria of Macri’s initial two years (in which the lack of reforms led to a loss of confidence) and the last two years, in which In addition to having a government that has wrong ideas on economic issues, the pandemic was suffered.
-What is lacking?
– A reinstitutionalization of the country is needed, new leaderships appear, there is a series of profound changes, such as those made in the time of Carlos Menem, which were successful. That government began with serious problems, with a change of minister and high inflation, but in 1991 it began to change course. It was successful for a long period. There there was a very profound change in the relationship of the State with the private sector. In the last 20 years we have had a serious setback. We are in a situation where it will be very difficult for the ruling coalition to have a relatively logical situation in the next two years.
– Is the context given for a process of deep reforms to take place, as in 1991?
– Now, with the government of Alberto Fernández I see it practically impossible. We have a governing coalition that has been tremendously weakened. It is centered on certain people who have a wrong ideology, of the populist and interventionist type in the private sector; they believe in price controls, stocks, nationalization, subsidies. The first element that leads to a series of profound changes such as those experienced in 1990 begins with a strong political leadership, which at that time had Menem who, in addition, and it is not to idealize it, I think he had a series of personal qualities that were very important. He was a person who listened, was willing to learn and tried to understand the situations that occurred in other countries of the world. Also, who was his minister of economy [Domingo Cavallo] he had previously been its chancellor, which allowed him to carry out a series of relations at the international level.
– You do not see strong leaderships today?
-Political leadership arises with a mandate, on the part of the voters, to make profound changes. At this time, when the Milei or Espert phenomenon is seen, with messages of wanting to eliminate the Central Bank (which I do not think they think in practical terms), there is a belief of wanting to end the monetary financing of the Central Bank, which has reached very high levels. It is part of the reasons that justify the levels of inflation that Argentina has had in the last two years. In 2021, the monetary issue exceeded 4% of GDP.
– The ruling party lost the last elections and, however, the financial market did not react in a bullish way. What analysis does it do?
– Although the Congress has its importance within the democratic process, Argentina is a country that is called hyper-presidential. The president can basically legislate through the DNU. The other issue is that a lot can happen in the next two years. Furthermore, within the opposition we do not identify a clear leader who will be the candidate. The opposition is also a coalition in which it is not clear how the spaces of power would be distributed. In addition to the political issue, we have a very disorganized economy.
– What do you see worrying?
– There is an economy with a high interventionism of the State, with twists and turns, without a clear and coherent economic plan. You have to get to the next two years without hyperinflation or a social explosion. That is another level of uncertainty. Argentina has lost relevance in the world, it is a marginal country and investors have a memory of the heavy losses they suffered in the financial market, but also in the real sector. There is also the arrangement with the IMF that is necessary, but no one envisions an agreement that will lead to structural reforms that improve the Argentine situation. Both the country and the Fund are in a difficult situation and will try to make a safe face [salvar la cara], as the Americans say.
– Are you surprised that this stage of the mandate has been reached without an economic plan?
– Nothing surprises me of this Government. There is a very large dysfunctionality of the ruling coalition. Argentina, in its attempt to change relations with the Fund, put many political elements into it. To some extent, some of those comments were aimed at the domestic public, but there are also some with a certain ignorance of how international finance works. The IMF will not change its modus operandi for Argentina. Even with the collection of the surcharge, which the Government asked to reduce, the cost of IMF funding is the cheapest that the country has. From Argentina, in addition, it is said that the United States is really the one that defines everything in the Fund. That is another misconception. Argentina lost its focus and is not doing its part, it does not have a coherent economic program. The IMF may be willing to make an agreement with Argentina without asking for structural reforms, as long as behind that there is an economic plan with a certain logic approved by the Fund’s staff. In this case, I think the Americans would have no objection. But the Fund staff will not validate these crazy ideas that Guzmán brings. Academically, the minister is well trained, but faces political limitations when we look at the relationship between Argentina and the Fund. I would not be surprised if Argentina does not make the March payment.
– What would happen in that case?
“Maybe I’ll do it later.” An agreement will be reached with the Fund at the end of the day, but investor confidence will not be generated. We are going to finance the maturities with a new agreement, in such a way that it is not the Fund’s fault that Argentina has a debt crisis in the coming years, and then it will be expected that a new government in 2024 will have a different orientation and another type of logic. That is the maximum hypothesis of the Fund. But first they are going to ask Argentina to do the economic plan. The Fund will not. He will also ask that the different political actors support him via Congress, because they are lending to this administration, but when the capital payments have to be made there will be another. On the other hand, from a geopolitical point of view, Argentina has not been taking the correct steps. When you support Nicaragua or Venezuela, people in the United States are horrified. When it approaches China, it also causes concern. The urgency of dealing with the Argentine issue rises because the United States does not want an excessive influence from China in the region.
– What happens with the Paris Club if Argentina does not arrange an agreement with the IMF in March?
– Not paying the Paris Club is less relevant; there are usually certain delays. The tip of the ball is the Fund, because it also has a domino effect on the rest of the multilaterals. If Argentina is in default with the IMF, the World Bank will not make the promised disbursements and will not grant new loans. There is little probability that Argentina will pay the maturities of US $ 4 billion in the first quarter, and that it will reach an agreement with the Fund at this time. On the IMF side, this week the Brazilian economist Ilan Goldfajn took office [como director del Departamento del Hemisferio Occidental], who is an orthodox and I do not think he has the spirit of helping Argentina simply because it is a neighbor of Brazil. He will take a tough position, not too tough to stop an agreement, but perhaps it would have been better if Guzmán reached an agreement before this man arrived. He had a major tactical error.
–If Argentina manages to agree with the IMF, do you think the country risk will decrease so that companies can access the international market or could there be new disbursements from multilateral organizations?
–The World Bank, CAF and IDB are going to grant loans for specific purposes, they are investments for social or infrastructure issues. I do not see the private sector making investments in Argentina as a result of an agreement being made with the Fund. Everyone expects a light agreement to buy time; it will not mean a radical change. It may be that the country risk will drop a little, from 1700 to 1200 basis points. Although it is an important change, it does not mean that Argentina will regain voluntary access to credit markets. Therefore, it is not relevant for companies in Argentina, where although the cost of financing is much lower than that of the State, it is still high by world standards. I do not see a wave of private sector bond issues after the agreement with the Fund. Closing an agreement with the IMF is necessary, but it does not mean that there will be a significant change in expectations on the part of economic agents.
– How do you see the levels of poverty in the country?
– It is an issue that worries me a lot, because we are talking about 40% of individuals in Argentina being poor. 10% are destitute. The percentages are sometimes very cold, but when we talk about homelessness there are more than 4 million people who do not even cover their food needs. 40% of poverty is 18 million people. They are very large numbers. Argentina has a level of inflation higher than 50%, it has been stagnant for 10 years, public savings have been spent in different subsidy schemes, it is an economy heavily intervened by the State, with high levels of interference, regulations and laws that they don’t make a lot of sense. Argentina spent the last 20 years in a situation in which it has one of the highest tax burdens in the world, with 40 points of GDP financed by a private sector. There are 8 million people in the private sector, while the public sector –among national, provincial, municipal employees, of public companies and beneficiaries of social plans– is 20 million people. This situation is not sustainable over time.