The Big Idea

Argentina | Liquidity management

| September 20, 2024

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.

Prices on Argentina’s sovereign debt lately have bounced back nearly to the ceiling of the year-to-date trading range. But yields still reflect significant solvency risk. Policy shock therapy has given way to a more nuanced approach intended to anchor the foreign exchange rate and further reduce inflation expectations. This foreign exchange rigidity has slowed reserve accumulation. Argentina’s willingness to pay is still quite strong as indicated by payments in January and July this year. This should reduce immediate liquidity risk. But solvency risk remains given the low stock of US dollar assets. The debt’s recent strong performance consequently looks mostly a function of external risk appetite and the high yield on the country’s debt.

Argentina continues to rely too much on exports as the primary supplier of hard currency. The capital account reflects low foreign direct investment and restricted external credit. The latest data through July on the foreign exchange balance shows a deceleration on the trade surplus coincident to historic tight levels on the real effective foreign exchange rate. Lower commodity prices and consistent debt payments are also not helpful. However, the tax amnesty regime provides temporary relief on US dollar supply while the Blue Chip official foreign exchange rate has also been relatively stable.

Ideally, bondholders prefer a weak foreign exchange policy for a structural trade surplus that rebuilds the stock of US dollar assets. However, the political reality is that an anti-inflationary strategy is critical to sustain high approval ratings, tolerance for fiscal austerity and overall governability. The near-term strategy is to source piecemeal US dollar flows and still prioritize biannual debt payments. There has already been a track record of priority status for Eurobond payments with specific funds designated offshore for the next $1.5 billion coupon payments in January.

The uncertainty over foreign exchange policy may represent only a temporary setback. The commitment to a balanced budget and debt repayment remain the primary anchors. The willingness to pay should reinforce the ability to pay, with Argentina now sourcing one-off US dollar flows but eventually should rebuild the US dollar stock.

There are conflicting near-term objectives with the anti-inflationary agenda now dominating. However, it is important to focus on the commitment to the fiscal anchor and the stabilizing impact on the external accounts. The fiscal accounts remain in surplus with a 0.4%-of-GDP nominal surplus through August 2024. The 2025 budget again targets a zero fiscal deficit plus introduces a rigid fiscal rule that includes debt service. The presidential veto has already been tested on the pension payments, with President Milei insisting that any unfinanced spending would be vetoed. The fiscal rule would be important on establishing a medium-term framework that’s important to bondholders and the International Monetary Fund.

The BOPreal bonds best reflect the near-term commitment to pay, with the shortest maturities and implied senior repayment status on sourcing US dollar liquidity. Argentina has lagged other similar credits, namely Ecuador, with bond prices logically sensitive to US dollar liquidity risks. Ecuador bond prices have decisively broken through key resistance at January 2023 price highs while Argentina is only now back to the ceiling of the year-to-date trading range.

There should be a high correlation between bond prices and foreign exchange reserves considering the low stock of US dollar assets and high (cumulative) US dollar bond payments. The weaker foreign exchange reserves are not ideal for medium-term solvency metrics.

However, the commitment to pay should offer a near-term anchor. This commitment is quite unique with US dollar funds to be transferred offshore for January payments and Eurobond payments a priority sourced from US dollar cash flow. The risk-on rally also continues to support high beta credits with a narrowing spread premium of Eurobonds relative to BOPreal bonds and provincial debt like BUENOS also outperforming sovereign debt. The near-term technicals are favorable. Argentina benefits from its superior liquidity relative to other high yielders, its ongoing distressed bond prices, higher current yield and amortization payments beginning in January for the 2029s and 2030s.  The track record and commitment to fiscal discipline should ultimately provide an anchor on credit risk, especially on a track record of priority debt repayment.

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

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 © 2024 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.

Important disclaimers for clients in the EU and UK

This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).

The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.

This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.

This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.

This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.

The Library

Search Articles