By Gabriel Thoumi, CFA, FRM. Originally published at ValueWalk.
- Argentina’s Alberto Fernández will need to be bold in aligning macroeconomic policy and market incentives with the preservation and sustainable use of its natural capital
- Fernández’s public support for his response to the novel coronavirus will give him the space to act boldly in macroeconomic policy, which should be tied to Argentina’s international climate commitments and promote sustainable development opportunities
- ESG investors can play a positive role in a renewable energy market with much opportunity
Q1 2020 hedge fund letters, conferences and more
Argentina’s Natural Capital Opportunity
Argentina sits at a fork in the road. While the coming weeks of negotiations over the restructuring of $66 billion of its sovereign debt will be tense as all stakeholders possess an interest in seeing the third largest economy in Latin America back on its feet.
The government’s initial proposal seeks to delay payments on debt until 2023. Interest rates on new bonds would start near zero, but ultimately rise to 2.33 percent. There would be a 5 percent haircut on principal, roughly $3.6 billion, while the main savings would come from the reduction of interest obligations, totaling nearly $38 billion.
Bondholders are not supporting the offer, but Argentina’s decision to skip its April 22 interest payments totaling $500 million on three bonds may encourage all parties to reach a deal by the end of the grace period on May 22.
Certainly, the task is formidable.
A Distressed Country
Argentina’s new president Alberto Fernández, a law professor and a social democrat, inherited a distressed country in December 2019. GDP over his predecessor Mauricio Macri’s term (2015-2019) fell 3.4 percent, its central government debt increased by 42 percent, inflation totaled 240 percent, and poverty grew to nearly 40 percent with almost 15 percent of children living in poor households. Government projections suggest that poverty could rise to 50 percent by the time the COVID-19 pandemic subsides.[i]
Yet, Argentina may have a once-in-a-generation opportunity to revisit what equity, well-being, and access to public goods actually means.
As the historian Ernesto Semán asserts, “Argentina will emerge from the pandemic infinitely poorer and more unequal than when it entered. But it is also likely that it will come out with more political resources than before to discuss how to deal with that cataclysm.”[ii]
Alberto Fernández will need to be bold in aligning macroeconomic policy, economic development, and market incentives with the preservation and sustainable use of its natural capital. Argentina should issue green sovereign bonds to finance this investment in its long-term economic stability and development.
Financing Argentina’s Sovereign Debt
Fernández has already demonstrated his willingness to act with conviction. He initiated a national quarantine on March 20 which has limited the devastation of the novel coronavirus. His approval ratings hover at 70 percent.
He has the political capital to act and align natural capital with sovereign health to benefit the citizens of Argentina while improving investors’ interest in financing Argentina’s sovereign debt.
In practice, his administration will need to continue some programs started during the Macri administration, in particular renewable energy, and to implement zero-deforestation policies and offer incentives for yield increases via sustainable intensification.[iii]
Fernández’s agrarian policy must balance short-term needs with medium- and long-term sustainable eventualities.
The Most Natural-Capital-Dependent Nation
Of the G20, Argentina is the most natural-capital-dependent nation, with its agricultural sector accounting for 60 percent of exports. Argentina’s agricultural sector is a key destination for sustainable finance and a critical source for earning US dollars.[iv] Yet, without implementing, monitoring, and enforcing laws and policies that protect and develop the country’s natural capital, Argentina stands to suffer greater economic instability and environmental degradation.[v]
Counterintuitively, the confluence of debt restructuring and the global COVID-19 pandemic may create ample opportunities for investors committed to sustainable development and finance. Argentina’s national and subnational governments will need to supply 65 percent of sustainable financing through 2030, approximately $3 billion per year between the agricultural and energy matrices.[vi] Green sovereign bonds could be structured similarly to those issued by Jujuy ($210 million) and La Rioja ($100 million) provinces in Argentina’s Andean northwest.
Future sovereign bond issues should be consistent with the Paris Agreement and Argentina’s climate change commitments, developing “sustainable growth opportunities and adopting measures that crowd in long-term investors”, including such productive and necessary options as renewable energy and energy storage, efficient buildings, green hydrogen and carbon, capture and storage (CCS) for industrial emissions, and land-use, adaptation and nature-based solutions. Allianz’s Günther Thallinger and the LSE’s Nick Robins observe, “This would allow private sector investors to help finance the recovery and governments to focus their recovery spending on setting the stage for such investment and support strong social standards to make sure the recovery plans are inclusive.[vii]
The Critical Role Of Private Investors
Thus, private investors have a critical role to play and can positively affect a resilient society by directing investments to projects that leverage Argentina’s natural capital. It would also help develop one of South America’s smaller capital markets. Moreover, the push to emphasize sustainable finance and ESG investment opportunities could be a lasting legacy of the Macri administration that possesses an otherwise dismal economic record. And the support among the business elite is matched by an institutional infrastructure and continued government interest.[viii]
Marcos Ayerra, head of Argentina’s securities and exchange commission (CNV), is at once bullish and cautious on the future of sustainable finance. Ayerra notes “the great challenge for Argentina is to have a local market… Our great challenge and the reason for our guidelines and ByMA’s (Argentina’s stock market) trading segment is that there is a local market. There are many potential issuers and investors.”[ix]
ByMA created a Social, Green, and Sustainable Bonds (SVS) board to highlight the securities used to finance projects benefitting the environment or attempting to resolve social issues. Julieta Artal, Head of Corporate Governance and Sustainability at ByMA, assures that “the issuers of these bonds must meet a series of requirements aligned with international standards and the guidelines” of the CNV. Inclusion in the SVS would feature new issues as well as reclassified ones that were offered before this classification existed.[x]
Other areas remain attractive, and with the economic volatility of 2019 and the pandemic likely to suck life out of the economy for half of 2020, there will be a build-up for issuing debt to proceed, for instance, with renewable energy projects. Argentina has the stated goal of achieving 20 percent of its energy needs through renewable forms, and it recently met its initial target of 8 percent by 2020.[xi]
Subsidizing Vaca Muerta Production
The Fernández administration may be tempted to divert resources to the massive Vaca Muerta shale oil and gas reserve in southern Argentina. Significant investments by Sinopec (China), Pan American Energy (joint Argentine-Chinese oil firm), Chevron (U.S.), Petrobras (Brazil), Pluspetrol (Argentina), and Wintershall (Germany) and the allure of energy independence has led the previous governments to subsidize Vaca Muerta production. In 2019, subsidies reached $426 million, or 12 percent of all energy subsidies. Still, the total cost of drilling and completion, taxes and a 10 percent return on investment is $56 per barrel, well above the Brent Crude price of $22 for June 2020 contracts. Still, Energy Secretary Sergio Lanziani will seek additional investments from China. Depressed global prices, the degradation to natural capital in southern Argentina via fracking, and the detour from meeting international climate change commitments are even more reasons for investors to pursue green projects.[xii]
Since 2016, Argentina has opened 131 new renewable energy generation parks that produce 2.1 gigawatts of electricity supplying clean energy to more than 2 million homes. This period brought in $4.35 billion in direct investment. Currently, 77 projects are underway with nine associated factories providing materials, generating almost 10,000 direct jobs and 2,000 indirect jobs throughout the country. A suite of wind and solar farms planned to produce 2.3 gigawatts and 1.1 gigawatts respectively still need to secure financing amounting to $4.8 billion. Building increased capacity in transport and storage infrastructures to efficiently use the produced electricity are additional projects that could benefit from entrepreneurs and sustainable finance.[xiii]
FIX notes that green bond issuances could generate $350 million in less than ten transactions in 2020 alone. For instance, AES Argentina Generación just issued a green bond of $48.4 million in the local market for a wind energy park in the Andean province of Neuquén.[xiv]
So, as Argentina stands itself back up again and resolves its debt obligations to its international creditors, Alberto Fernández’s administration must support a sustainable finance sector and sustainable growth opportunities that protect, enhance and leverage its abundance natural capital.
Investors guided by ESG principles can do well by doing good and invest in the productive forces of Argentina.
Article by Steven Hyland, Ph.D. and Gabriel Thoumi, CFA, FRM
Footnotes
[i] Alcalá Kovalski, Brookings Institution (5 September 2019) Lessons learned from the Argentine economy under Macri; Jueguen, La Nación (5 December 2019) La pobreza en la Argentina llega al 40,8%, según la UCA; La Nación (23 April 2020) Coronavirus en la Argentina: “La sociedad va a quedar más empobrecida”, advirtió Agustín Salvia, titular del observatorio social de la UCA; Rosemberg, La Nación (22 April 2020) Coronavirus: el Gobierno prevé que el índice de pobreza estará entre 45 y 50% cuando termine la pandemia
[ii] Semán, Revista Panamá (8 April 2020) Surfeando la pandemia
[iii] Pinzón, Robins, McLuckie, and Thoumi, Grantham Institute, LSE and Planet Tracker (January 2020) The sovereign transition to sustainability: Understanding the dependence of sovereign debt on nature
[iv] McLuckie and Thoumi, ValueWalk (4 November 2019) Argentina Can Solve its Financial Crisis by Feeding the Planet Sustainably
[v] Pinzón, Robins, McLuckie, and Thoumi, Grantham Institute, LSE and Planet Tracker (January 2020) The sovereign transition to sustainability: Understanding the dependence of sovereign debt on nature
[vi] Hugman and Pinzón-Torres, Grantham Institute, LSE, and Investec Asset Management (January 2020) Argentina: debt restructure presents the chance to shift to climate-sustainability
[vii] Thallinger and Robins, Responsible Investor (22 April 2020) Post-Covid recovery packages must quicken the pace to net-zero carbon emissions.
[viii] Candelaresi, El Cronista (28 November 2019) La apuesta de Alberto a las energías renovables; Fenés, Energía Estratégica (28 October 2019) Qué piensa hacer el nuevo presidente de Argentina con el desarrollo de las energías renovables
[ix] Cohen (Accessed 24 April 2020) Inversión sostenible: La nueva normalidad que promete despegar en el mercado local
[x] Fernández, La Nación (15 February 2020) Emisiones sustenables. Las empresas apuestan a los bonos verdes
[xi] Spaltro, El Cronista (6 February 2020) Las energías renovables marcan un récord en su etapa más oscura.
[xii] Koop, Diálogo Chino (9 April 2020) Argentina halts renewable rollout amid coronavirus; Raszewski, Reuters (23 April 2020) Argentina plans higher local oil price to protect sector amid rout; Hellenic Shipping News (30 December 2019) Argentina faces big challenges to develop Vaca Muerta for export growth; Institute for Energy Economics and Financial Analysis (11 November 2019) Financial crisis delays Vaca Muerta gas pipeline project in Patagonia, Argentina; iProfesional (24 February 2020) El Gobierno, a la caza de fondos chinos: buscará potenciar la inversion en Vaca Muerta y otros proyectos energéticos
[xiii] Prioletta, Energía Estratégica (22 April 2020) Argentina, una experiencia removable; Gilbert, Bloomberg (28 January 2020) Argentina’s Clean Energy Future Is at Risk Under New Leadership; Louzau, La Nación (26 February 2020) Energía renovable. Se inauguran obras que comenzaron con Macri, pero no hay nuevos proyectos.
[xiv] Redacción EcoJournal, EconoJournal (18 Febraury 2020) AES emitió el primer bono verde en el mercado argentino.
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