Thursday, 24 January 2019

Taking stock

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  • Taking stock
  • The Argentina congress building in Buenos Aires

Investors’ enthusiasm for Argentina’s turnaround story remains high but many are taking stock as they wait for the new government to deliver on growth.

After reaping the benefits of a strong run-up in Argentina assets, investors are taking stock and viewing the South American country more cautiously as the new government starts to hit road blocks in its efforts to fix the economy and garner political support.

President Mauricio Macri’s rapid rollback of his predecessor’s statist policies and a historic settlement with holdout investors earlier this year quickly made Argentina the new market darling and one of EM’s top performers.

The spread on Argentina’s country component of JP Morgan’s EMBI Global Diversified tightened 149bp between January 21 and April 21, outperforming the 99bp narrowing on the broader index.

How much upside is left, however, will depend on whether Macri’s minority government can kick-start the economy before the mid-term elections in 2017 as it seeks to gain legislative support to carry out further reforms.

“For the Macri pop to continue you need growth to recover,” Anupam Damani, a portfolio manager at TIAA Global Asset Management told IFR.

Hopes of a fast convergence to double B status – in line with Brazil – may take longer than some had initially thought. Indeed, markets arguably got ahead of themselves earlier in the year amid the initial euphoria over the first bold steps taken by Macri’s crack finance team of former Wall Street bankers.

The removal of FX controls, the lifting of utility tariffs, the resumption of payments to bondholders and the sovereign’s return to the capital markets after a 15-year hiatus all lifted the spirits of investors earlier in the year.

“There was some initial euphoria about buying Argentina, but it was not so much credit momentum but euphoria about the charm offensive from the economic team,” said Siobhan Morden, head of Latin American debt strategy at Nomura.

Indeed, much of the heavy lifting lies ahead and the jury is still out on whether the government can carry out its macroeconomic adjustments before political fatigue sets in.

High inflation and a tough economic backdrop have already spurred strikes and protests as the populace feels the pinch. Failure to rapidly put the economy back on track could give investors second thoughts about the credit.

“We are very conscious of the backtracking on some of the fiscal discipline that was earlier espoused,” said Sean Newman, a senior portfolio manager at Invesco. “We will be looking at the extent of further deterioration.”

Investors, including the Argentine money that fled during the Kirchner years, will need some convincing before committing long term to a country that has a long history of defaults and populist governments.

Non-Peronist presidents – such as Macri, who only took office in December – have struggled to stay in power very long.

“We will have a shallow recession this year but, in order to have a real catalyst to turn growth, you need foreign direct investment and there are no FDI flows that validate strong growth momentum,” Morden said.

The government proposed a tax amnesty plan in May as sought to lure back billions of dollars in offshore money. The idea is to use the funds for infrastructure investments, but also to pay pensioners as the government seeks Congress’s support.

Supply surge

In the meantime, municipal governments and corporates have been rushing to market to take advantage of the rally in the wake of the sovereign’s historic US$16.5bn multi-tranche bond sale in April.

Close to US$70bn in orders for the new bond underscored the pent-up appetite for Argentine risk, not to mention investors’ hunger for yield at a time of loose monetary policies across the developed world.

At the time, it sold a US$2.75bn three-year at 6.25%, a US$4.5bn five-year at 6.875%, a US$6.5bn 10-year at 7.50% and a US$2.75bn 30-year at 8% with a 7.625% coupon.

By early June, yields on those bonds had tightened to 4.41%–4.23% on the 2019s, 5.64%–5.52% on the 2021s, 6.61%–6.53% on the 2026s and 7.12%–7.07% on the 2046s.

The City of Buenos Aires, as well as the provinces of Cordoba, Mendoza, and Neuquen, were quick to follow, bringing close to US$4bn in new supply by early June. Other provinces such as Salta are also lining up.

Corporates have also been active participants. State-owned oil firm YPF and mortgage bank Banco Hipotecario, as well as Cablevision – a pay TV and internet service provider owned by Grupo Clarin – have already raised US$1.65bn between them.

Financial institution Grupo Supervielle also broke the silence in Latin America’s equity markets to raise about US$280m through an upsized IPO, the region’s first in close to a year.

More firms are eyeing deals in the capital markets, including Pampa Energia, which recently bought Argentine asset from beleaguered Brazilian oil entity Petrobras.

Dollar inflows from new issuance are leading to a rally in the peso – which does not help exporters – even as the central bank cuts interest rates to spur growth.

Investors may also be suffering from some indigestion after the recent supply surge, making it more difficult and more expensive for any borrowers looking to tap later in the year.

Larger, more liquid debt issues such as the Province of Buenos Aires’ US$1.25bn of 9.125% 2021s have put in sound performance, trading at 8.093% in mid-June, after hitting a tight of 7.676%. 

But smaller deals have been putting in relatively lacklustre performance. Province of Mendoza’s recently issued 8.375% 2024s, for instance, were trading just south of par at a yield 8.482% in mid-June, according to Thomson Reuters data.

“The appetite for Argentine debt issuance might be reaching a point of saturation,” wrote Morden in a recent report. “… This reaffirms a higher beta status for Argentina and vulnerability to the recent reversal on external risk.”


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