The Big Idea

Argentina | A confidence booster

Siobhan Morden | July 29, 2022

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. This material does not constitute research.

Investors should look at Argentina through the lens of breakeven returns. The third turnover in economic leadership in a month is worrisome, but the market seems to take comfort from the strong political capital brought to the job by new “Super” Economy Minister Sergio Massa. Historically low bonds prices also appear increasingly attractive after the rally in other speculative grade issuers across emerging markets. Just getting coupon payments into early 2024 would allow investors to breakeven at current prices on some of Argentina’s debt. Short of a worst-case scenario, Argentina sovereigns look like good relative value.

Argentina’s plan for managing the economy remain the same. Argentina needs to manage the treasury funding and foreign exchange pressures with incremental measures and show progress towards fiscal consolidation and positive real interest rates. Successful treasury auctions and aggressive interest rate hikes have given the country some breathing room. However, it’s an uncertain month-to-month process of managing a moderate economic transition through acute imbalances in spending and revenues. There is no quick fix and no positive shock that can quickly turn things around. The new economic team under Minister Massa will have to stick to the plan of only gradual adjustment, limited by social pressures that discourage shock therapy. If Argentina can manage investor confidence, then each month should bring the country closer a stabilizing political transition in October 2023 (similar to October 2015). It would take extreme worst-case scenarios over the next 18 months for current prices around 20 on Eurobonds to make sense.

The latest cabinet reshuffle once again puts a spotlight on how the Fernandez administration plans to deliver on the International Monetary Fund economic program. There is not much margin for policy flexibility under the opposing objectives of adjusting the economy under an IMF program and managing the social pressures from inflationary shock. The market for now seems to see Minister Massa as a moderating influence on Kirchnerismo and likely to get better execution of a difficult IMF program. It will require a combination of political capital and technical expertise to deliver IMF program results.

The former Economy Minister Silvina Batakis had effectively managed the finances of the Province of Buenos Aires under the Scioli administration. The similar-style fiscal adjustment for the federal government would rely on capex cutbacks as well as the inflationary revenues, tariff hikes on income segmentation and efficiency savings among public entities. This probably remains the same recipe under Massa. The IMF would also still provide technical advice through the transition and require similar commitment on whoever leads the economic team. The burden remains the same. Argentina needs to deliver results on fiscal consolidation and positive real interest rates over the next few months. This is the only quasi-anchor to manage investor sentiment necessary for rolling over domestic debt and reducing foreign exchange stress. The latest cabinet reshuffle provides some near-term optimism, especially following the aggressive 600 bp hike of the central bank policy rate.

Steady muddling-through should keep rollover risk low on Argentina’s restructured debt payments. The low debt payments should remain a priority US dollar liability for the current Fernandez administration, which restructured the bonds with backloaded payments. The coupon payments on select bonds, at near four points for the ARGENT’38 and ARGENT’41, is actually meaningful on a breakeven return analysis with bonds trading in the mid-20s. The current bond prices imply worst case scenarios of 20 on recovery value compared to the 40 net present value in 2020 and 32 net present value in 2005. These levels would be difficult to rationalize under a base-case view of a moderate policy transition. Moderate policy transition relies on a few core assumptions:

Broader public awareness on the need of a fiscal anchor
Limits on funding from underdeveloped local markets, restricted access to external markets and inflationary backlash of excessive deficit monetization

The bottom line is that a rational IMF program from a center-left administration shows a mature societal and political shift towards policy moderation. This should not only imply reasonable exit yields (say near 15%) on a debt restructuring but also equitable burden sharing of liquidity relief and fiscal adjustment (higher trend primary surplus). There is still potential for near-term mark-to-market risk on the execution risk of a difficult IMF program; however, a medium-term investment horizon still suggests positive optionality from current low bond prices.

Siobhan Morden
Santander Investment Securities
1 (212) 692-2539
siobhan.morden@santander.us

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Siobhan Morden
siobhan.morden@santander.us
1 (212) 692-2539

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