The Big Idea
Argentina | Benefit of an IMF anchor
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Optimism about a deal between Argentina and the International Monetary Fund has triggered the sovereign’s notable recent outperformance. Technicals also were broadly supportive for Argentina’s debt with valuations still wider than the early January tight levels. I am still constructive on curve normalization with the shorter tenors likely to benefit from the liquidity relief of a new IMF program.
Negotiations between Argentina and the IMF are progressing. The administration has submitted an executive decree seeking domestic legislative approval and release of some initial information. There are details still missing including the disbursement schedule and the conditions. However, the tone remains optimistic on expectations of significant liquidity relief for the economy and bondholders. The executive decree implies not only front-loaded funds through the election cycle but also a flexible 10-year repayment cycle.
There are some potential tensions over the rigidity of foreign exchange policy with much debate about upfront funds and program conditions. The compromise seems to target the central bank balance sheet with some front-loaded funds to cancel low-quality Treasury assets. This would improve the US dollar liquidity of the central bank balance sheet at an opportune moment of slower foreign exchange reserve accumulation and also allow for a net neutral impact on overall debt ratios. There is yet no confirmation of the amount of relief to the central bank. The executive decree references 2025 maturities at $10 billion notional. However, any amount would provide a welcome cushion at a critical moment of external pressure.
The second phase of assistance should provide breathing room on the IMF loan repayments. These ramp up next year with hefty payments from 2027 to 2032. The announcement of a 10-year repayment schedule with a 4.5-year grace period would provide considerable near-term liquidity relief as Eurobond sinking fund and amortization payments escalate. The lengthy term loan repayment shows an unprecedented commitment to assist with medium-term liquidity stress. It also coincides with the timeframe for a structural improvement on the external accounts. This is maybe more relevant than the front-loaded funds this year with a longer-term commitment through the mature phase of economic stabilization.
The bottom line is lower near-term liquidity risk, especially after the mid-term elections. This should benefit those bonds with front-loaded payments including the 2029s and 2030s. It should also help the majority of bonds with sinking fund features like the 2041, 2046s and the 2038s. It is the 2035s that are most at a disadvantage, with most payments backloaded, while the 2046s appear mostly to benefit for their active sinking funds beginning 2025. The laggards from the February weakness—2035, 2041, 2038—have potential for catch-up returns; however, my top picks for core exposure are the 2030 and 2046 tenors. The entire curve has shifted lower with the valuations mid-range between the worst end February and the best in early January. This should allow for additional room for outperformance on confirmation of a supportive IMF program.
Argentina still offers the best relative value comparisons with the ‘CCC’ and ‘B’ peer group based on valuations and the most forceful economic transformation. Argentina is the top performer so far this month next to outlier Bolivia, and in sharp contrast to the weakness across other high yielders like Ecuador and El Salvador.
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