Uncategorized

Argentina | Optionality

| February 26, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

Recent Eurobond performance, with prices retracing to the lows, suggests the markets are leaning bearish on Argentina. The low cash prices have helped defend against the latest US Treasury weakness. More important is whether there is any medium-term possibility of higher prices. The current bond prices in the $30s are deeply discounted at yields now approaching 18%. This creates asymmetric price upside, but timing is critical. Near-zero coupons offer little carry, and there are no signs of a policy shift or significant external shock that might deliver a meaningful improvement to weak liquidity and uncertain solvency.

Argentina suffers from still a huge debt burden of Eurobond, local USD bonds and International Monetary Fund loans.  The low Eurobond prices reflect the heterodox policy management that perpetuates balance-of-payments stress and prevents accumulation of foreign exchange reserves needed to make future debt payments.  There is a clear mismatch between zero USD assets (net liquid FX reserves) and a roughly $150 billion stock of USD liabilities (USD denominated debt) that require a shift of balance-of-payments from deficit to surplus to rebuild the stock of USD liquidity. The restructuring of Eurobonds and local USD debt last year only provided near-term liquidity relief by creating lower coupons and delayed amortization payments while IMF negotiations also only seek liquidity relief to postpone loan payments. The annual USD payments after restructuring for Eurobonds and IMF loans would still be high at $10 billion to $12 billion a year from 2025 to 2034.

Argentina should eventually reach an IMF agreement to postpone the huge $49 billion cumulative payments, but risk of delays until later this year are worrisome for what it represents – a reluctance to commit to a fiscal anchor and continued heavy reliance on seigniorage that perpetuates high inflation, undermines foreign exchange competitiveness and sustains balance-of-payments stress. There has also been more emphasis on diplomatic politicking—to lobby IMF board support—than on discussing a reasonable economic program that best delivers a favorable growth and inflation tradeoff.  The IMF program will also have to update the DSA metrics. It will be a challenge to explain how Argentina can repay these heavy USD liabilities with low growth potential, no commitment to a fiscal anchor and a relatively closed economy with insignificant foreign direct investment, insignificant capital inflows and persistent capital flight.

There are no catalysts to deter policy management away from the isolationist and interventionist public consumption growth model. The IMF program is mostly a political compromise with expectations of only a “light” program while the current stagflation probably won’t punish the Fernandez administration at the midterm elections.  This is somewhat of a disservice to other creditors that are subordinated to senior IMF loans and require policy orthodoxy for future debt repayment.

The market expectations REM survey show an economy that only slowly recovers at 2% annual growth after a 10% GDP decline in 2020 with high inflation at 30% over the next two years. The muddling-through stagflation may avert relapse into economic crisis, but the persistence of macro imbalances does not allow for a quick correction to the balance-of-payments stress and slows the pace of foreign exchange reserve accumulation with only a few years remaining until the first amortization payments.

The muddling-through also does not benefit bondholders holding near-zero coupons and a gradual step-up structure for overall low average coupons.  The structural low coupons partly explain the high yields with low current yields that deter against “carry trades” and disincentivize long positions. The 15% to 18% yields are not “cheap” if the extremely low current yields reflect no near-term payments and still high uncertainty about medium-term payments. This shifts countries like Argentina and Ecuador into a separate category versus high coupon emerging markets credits.  The decision on whether or not to buy Argentina depends on whether the country can steadily improve liquidity ratios to rebuild foreign exchange reserves for stronger prospects of future debt repayment.

The balance of payments is not only a critical determinant of sovereign debt payments but also increases convertibility risk that weighs on corporate and quasi-sovereign debt payments. (The central bank just extended the regulatory FX restrictions that force a restructuring of corporate and quasi-sovereign Eurobonds. This represents a new worse chapter for Argentina default and emphasizes the importance of resolving the balance of payments stress for all Argentine entities).

What could shift the bearish view? There has been frequent reference to the positive external shock of higher commodity prices. However, the higher seasonal agrodollars from April to July may just reinforce the status quo to repay the Paris Club and IMF, postpone program discussions and interrupt foreign exchange reserve accumulation. The 38% year-over-year increase in soy prices in 1Q21 was only sufficient to stabilize foreign exchange reserves. The higher agricultural exports would have to not only finance the Paris Club and IMF payments but also chronic capital flight. The foreign exchange reserve accumulation depends on a narrowing of the gap between the blue-chip foreign exchange rate and the official foreign exchange rate and a virtuous circle that improves investor sentiment with more orthodox policy management and a fiscal anchor.

admin
john.killian@santander.us
1 (646) 776-7714

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.

Important Disclaimers

Copyright © 2023 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.

In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.

The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.

In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.

Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.

The Library

Search Articles