By Rodrigo Campos, Walter Bianchi and Jorge Otaola
NEW YORK/BUENOS AIRES (Reuters) -Argentina’s first major bond sale in seven years, a $1 billion offering with payments in pesos, is a clear sign that global investors are regaining their faith in a country recently mired in triple-digit inflation.
But the nearly 30% yield, higher than many expected, showed a high level of apprehension remains.
President Javier Milei needs to prove to Argentines voting in October, the International Monetary Fund and foreign investors that the economic recovery will continue. Annual inflation has fallen to near 50% from over 270% a year ago. He has convinced the IMF to lend Argentina $20 billion and slashed government spending without losing much popularity, even though nearly 40% of Argentines live below the poverty line.
Argentina owes around $300 billion, about $60 billion of which is in dollar-denominated international bonds. A return to dollar-denominated financing in global capital markets is embedded in the IMF program and is sorely needed to cement the recent recovery.
This week’s offering is “an important milestone on the path to refinancing future dollar commitments,” said economist Gustavo Ber, head of Buenos Aires-based Estudio Ber. BTG Pactual called it a “savvy move” with the same outcome as the central bank buying dollars with pesos, without distorting the foreign currency market.
The government said late on Wednesday that demand for the 5-year notes was about 1.7 times the $1 billion cap. The 29.5% yield exceeded initial expectations for about 25% and investors have the option to sell back the bonds after two years.
Markets on Thursday signaled partial support, when prices for Argentina’s dollar bonds issued under foreign or local laws rose marginally.
Auctions like this could be replicated but other steps are crucial, said Armando Armenta, senior economist at AllianceBernstein.
“It would be better to see more foreign direct inflows and, more importantly, the central bank purchasing reserves to meet the net international reserve accumulation targets,” Armenta said. “This would open the door for Argentina to access the dollar sovereign debt market early next year.”
PESO DEBT
On Thursday, peso-denominated debt prices fell and the 10-year local note yield rose, roughly to 27% from 26%.
“These rates in pesos are very high, considering their expectations of inflation falling towards 10% in the next two years,” said Clyde Wardle, senior emerging markets FX strategist at HSBC, of the yield paid this week.
If the current 47% inflation keeps falling sharply, those rates will turn out to be very high and raise the risk of pushing the government to print pesos to pay bondholders, he said.
The new offering’s yield was well above the expectations of local brokerage Puente, which noted that it “does not indicate strong conviction regarding the future evolution and sustainability of the (currency exchange).”
The peso has fallen about 9% to the dollar since capital controls were loosened in mid-April. Argentina has promised the IMF to add $4.4 billion to its net reserves by mid-June. Those reserves were in the red in December and analysts doubt the June objective will be met.
The new bond shows investor limits for now, HSBC’s Wardle said. “It is unlikely Argentina could find an affordable dollar-denominated issuance rate that attracts foreign investor interest. There is still too much uncertainty about growth.”
(Reporting by Jorge Otalola and Walter Bianchi in Buenos Aires and Rodrigo Campos in New York; Additional reporting by Eliana Raszewski; Editing by Richard Chang)
Comments