Argentina’s second smallest province is readying a dollar denominated bond, looking to become the 13th sub-sovereign authority to issue since the government exited default a year ago.
But analysts remain calm at the nearly $40bn of public sector debt the country has raised in the last year alone.
They did, however, warned that it was crucial for the country to accelerate its fiscal consolidation after this year’s mid-term elections if it were to avoid increasing its debt stock to concerning levels.
UBS and Puente are taking Tierra del Fuego to meet bond investors for a deal expected to be priced this coming week.
Graham Stock, sovereign strategist at Bluebay Asset Management, said he was “reasonably sanguine” about Argentine provincial debt issuance.
“The country’s overall debt stock is not high, and each province has issued small amounts,” Stock told GlobalMarkets. “They have been disciplined about roadshowing their deals, and the variation in spreads shows that investors are differentiating between provinces.”
Indeed, one credit analyst in Buenos Aires said that Tierra del Fuego wanted to price its 10 year amortising deal, which will have a 6.4 year average life, in the 9% area. This compares to the 7.2% yield available on Mendoza’s outstanding 2024s, the 7.9% available on Salta’s 2024s, and the 10% yield offered by Chaco’s bonds maturing in the same year.
Provincial and city governments have raised a total of $9.85bn in international bonds since March 2016, despite most of them relying on federal government transfers for revenues.
And some US bond investors told GlobalMarkets that they felt “fatigue” at the amount of supply to have emerged from these issuers. Moreover, many turn their nose up at the illiquidity of these often sub-$300m deals.
“It is definitely a challenge for the market to keep absorbing so much Argentine supply,” said one EM bond investor.
But Robert Sifon, managing director in Standard & Poor’s sovereign and public finance ratings division for the Americas, said that provincial issuance was “not a concern”, saying there was good co-ordination between the central government and the provinces, “including with those governments that are not from the official party”.
Moreover, said Sifon, these deals bring more scrutiny to the provinces’ management of their funds, which could be positive.
“The reason people get concerned today is because you look at the history and it tells you that you increase debt, spend it on current expenditures and then at the end of the day have nothing to show for it,” said the S&P MD. “It is the million dollar question, because the provinces are issuing for capital expenses.”
Having inherited a shrinking economy and eye-watering inflation in December 2015, Mauricio Macri’s government has taken a decidedly gradual approach to fiscal adjustment to avoid inflicting further pain on the economy.
An initial pledge to bring the fiscal deficit down from 5.4% of GDP in 2015 to 3.3% by the end of 2017 became, in September last year, a target of 4.2% of GDP for this year’s deficit. Argentina managed to reduce the deficit to 4.6% in 2016, and is still targeting 4.2% for this year, 3.2% in 2018 and 2.2% by 2019.
Progress here, which investors expect to be able to accelerate after October’s legislative elections, is central to Argentina maintaining favour among investors.
“If the fiscal adjustment remains slow, and the pace of issuance remains high, then the debt stock may become more of a concern,” said Stock at Bluebay.