Investors cool as Argentina steps up local currency issuance
GlobalMarkets, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Emerging Markets

Investors cool as Argentina steps up local currency issuance

Sterilization of FX intervention is seen as the main motive, rather than capital market development

Argentina announced the sale of a five-year Bonar V bond for 4.5 billion pesos ($1.45 billion) with a 10.5% coupon on June 7, the largest since the restructuring of external debt in 2005, amid questions over monetary policy strategy that caused jitters in the local bond market.

Investors reacted negatively after the national statistics office, INDEC, reported a lower-than expected inflation figure for May, at 0.4% month-on-month, leading to fears the government is manipulating the data.

Omar Borla, Latin America economist at Dresdner Kleinwort, noted that foreign investors will continue to buy into Argentine peso-denominated paper despite these questions, as there is appreciating pressure on the currency. “This is a win-win situation; foreign investors are banking on an appreciating currency and for the government this removes foreign currency risks,” Borla told Emerging Markets.

However, the view remains that the level of local issuance has more to do with sterilizing purchases of hard currency by the central bank, which is under pressure to stop peso appreciation in order to protect export competitiveness. This presents a potential dilemma at a time when the BCRA’s inflation-fighting credentials are in the spotlight.

In particular, Borla argued that Argentine issuance does not appear designed to develop deeper local capital markets like those in Chile. “They are not trying to develop local capital markets, if they were they would be vying for pension fund reform, but they are not doing so”.

Paul McNamara, fund manager at Augustus Asset Managers, was more sharply critical at a Fitch ratings seminar on Tuesday, and cast doubt on the value of borrowing locally, rather than accessing cheaper credit on international markets.

“Latin American countries have a phobia about debt, so it is stupid for countries to borrow in local currency at a 10 to 11% coupon when countries could borrow for half the rate by issuing dollar bonds.”

Argentina remains excluded from borrowing in US or Eurobond markets, as it has yet to restructure around $20 billion in sovereign debt that went into default in 2001-2002. But the sovereign has borrowed in dollars in the local markets.

“The idea that local currency debt could converge to US bonds is very risky idea...and the private sector has been the biggest loser in Argentina from the debt exchange program so this backdrop needs to be considered,” McNamara added.

He argued that yield-hungry investors were being complacent about the risks: “If you indulge in local currency debt you are under their [the sovereign issuer] rules in terms of capital controls and the sudden imposition of taxes,” he concluded.

That said, Frederick Z. Jaspersen, country director for Latin America at the Institute of International Finance, was more positive. He believed that the regions’ economies are stabilising and so attracting private capital. “In Argentina like the rest of Latin America, spreads resume their decline to record lows following March volatility... and investors are impressed with the improvement in the region’s fundamentals.”

Gift this article