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Investors Stoked About Record Levels of Argie Paper Despite Sustainability Concerns

Argentina, like many other emerging markets, is looking to take advantage of the calmer market conditions and a pullback in the US dollar seen in the first weeks of 2017 to borrow up to US$13bn from international lenders and investors. The sum has some observers concerned about the sustainability of its borrowing.

Jan 13, 2017 // 6:09PM

The newly installed finance minister Luis Caputo announced the country is set to secure US$13bn in the next week, which represents 65% of all the money the country needs to raise this year to fulfil its financial obligations.

On 12 January, Argentina secured a US$6bn 18-month loan from BBVA, Citi, Deutsche Bank, HSBC, JPMorgan and Santander, the same banks that are set to arrange the sovereign’s US$7bn bond sale next week.

This is the third bond sale conducted by Latin America’s fourth largest economy in less than a year. In April 2016, Argentina returned to the international markets after 15 years with a US$16bn sale. Argentina issued a 6.25% US$2.75bn 2019 tranche, a 6.875% US$4.5bn five-year note, 7.5% US$6.5bn 2026 tranche, and a 30-year 7.625% US$2.75bn note. It followed that up with a dual-tranche US$2.68bn trade in July.

Most of the funds secured in the transactions were used to pay off Argentina’s holdout creditors.

Officials are scheduled to meet with investors in New York and London to arrange the US$7bn bond sale on international markets, while the other US$2bn will be sold in local markets.

The country is under significant pressure to cover its obligations in 2017. It needs US$23bn to cover its primary deficit, US$20bn for capital maturity, US$17bn to pay back existing bonds and US$2bn to pay multilaterals, amounting to roughly US$40bn this year.

Bond sales by Argentina’s federal and provincial governments and Argentine companies are expected to lead the way in Latin America’s primary markets this year, with up to US$35bn in bond sales expected.

According to Martin Castellano, a senior economist at the Institution of International Finance (IIF), improved policies have boosted non-resident appetite for Argentine securities, bolstering the government’s finances.

Sustainable debt

While some analyst question Argentina's debt sustainability, especially given its turbulent history, others believe all of the steps being taken by the current administration are positive for the country.

Jan Dehn, Head of Research at Ashmore Investment Management, believes Argentina and other South American countries are set to offer the best returns this year – better than any other fixed income market in the world.

“Argentina is likely to attract more and more investors as it joins the local JP-GB EM index in February, which will produce immediate cash flows into local markets,” Dehn said.  

“A country like Argentina does pose some risks, but it is not likely to be a problem for the next ten years.”

Eric Ritondale, chief economist for Econviews, agreed. “Last year was the most demanding in terms of securing enough capital to satisfy Argentina’s financing requirements, but regardless of the substantial bond sale in previous months, its overall debt level remains relatively low.”

“As long Argentina’s economy begins to grow at 3% each year, and the government reaches its objectives of reducing the fiscal deficit, Argentina should be able to maintain its debt repayments in the long run,” he added.

Argentina has implemented a series of fiscal and monetary reforms, but President Mauricio Macri faces increased pressure to stabilize the economy in the run up to the mid -term elections, where one third of the Senate is up for grabs later this year.

A series of tax reforms, including a fairly sizable income tax reduction, was disclosed by the new Treasury Minister, Nicolas Dujovne, in early January.

President Macri announced earlier this week that the government reached an agreement with different energy companies to kick-start flagging production at Vaca Muerte, among the largest shale gas reserves in the country.

Coupled with a commitment to invest US$15bn into the domestic shale industry, companies are set to receive a series of state benefits including tax breaks and labour subsidies.

“Both the fiscal amnesty and the announcement of the Vaca Muerta project will provide some certainty to investors” Dehn adds.

Argentina Deals Policy & Government

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