The Big Idea
Argentina | Full normalization
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The normalization of Argentina’s Eurobond curve to single digits now opens the debate about fair valuation. The 9% to 10% yields seem realistic. Argentina still faces a long process of rebuilding foreign exchange reserves and transitioning the economy to growth led by foreign direct investment. But positive policy momentum could continue to push yields lower, possibly closer to the ‘B’ category of El Salvador or Honduras.
The recent headlines for Argentina have focused on debt buybacks and new investment in education, on syndicating bank financial support and reviving an economic reform agenda. The optimism is palpable. Economic reform typically comes in the next 12 months ahead of the next election cycle. The administration of President Javier Milei has decided to frontload reform and call extraordinary sessions next month after the December 10 turnover of the legislature. This tries to turn stronger political capital into tax and labor reforms, a critical part of the IMF program. The IMF talks should also focus on how to further adapt monetary and foreign exchange policy with revisions typically coming around yearend. The timing is opportune. It capitalizes on strength as the foreign exchange rate shifts away from the ceiling of the exchange band.
This may reflect the pre-election excess US dollar demand and unwind of election-related foreign exchange hedges. There has also been a release of pent-up corporate US dollar issuance. The question next shifts to the sovereign market re-entry with yields now decisively in single digits. This is the more logical venue to source US dollars for the upcoming bulky $4.5 billion in January Eurobond payments. The alternatives would be indirect market access with collateral support from the banking community or lender-of-last-resort access to the US government. It’s not clear whether new issuance would coincide with a debt liability operation to target the heavier payments on the shorter maturities. The shorter tenors should at least benefit from the reinvestment inflows and the lower liquidity risks from the improving USD cashflow position.
The electoral outcome was far better than expected alongside demonstrated US financial support. This represents a powerful combination. Investors should note that policy management is shifting from economic stabilization to medium-term development. The renewed commitment across society and the political establishment should raise confidence in orthodox policy management. The shifts in foreign exchange and monetary policy should finally encourage foreign direct investment, along with de-regulation and the Régimen de Incentivo para Grandes Inversiones or RIGI investment framework. Real money EM investors should revisit stale overweight positions and reassess a larger overweight heading into the scarce emerging markets investment opportunities for next year. Mutual fund positioning shows a lower overweight ahead of midterm elections in September relative to the 4-year average.
Investors should target high conviction carry with upside from capital gains as yields drift lower, even sub 9%, based on progress on economic reform and debt liability management. Argentina remains still one of the higher yielding credits across ‘CCC/B’ emerging markets credits. My preference for the shorter maturity 2029 and 2030 bonds should further benefit from bullish curve steepening and potential debt buyback. The initial argument for these shorter tenors was focused on the US as a lender of last resort. This is now further reinforced by the possibility of stronger liquidity from higher USD corporate issuance, sovereign market access and even early FDI inflows. The US lender of last resort may also reduce the market beta and sensitivity of local markets to global financial markets (or at least the shortest tenors.)
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