Argentina’s international bonds leaped to their highest in more than a year after the government said it planned to repurchase about US$1 billion of the debt, surprising investors in the cash-strapped country.
The nation’s US$16.1 billion in overseas bonds due 2030 rose 2.5 cents to 35.5 cents on the dollar to the highest since October 2021, paring gains from earlier in the day. It is those bonds, plus ones maturing in 2029, that the government plans to buy back, Economy Minister Sergio Massa said Wednesday, without giving details. The Central Bank will lead the process.
For investors, the key question is where the money comes from, Portfolio Personal Inversiones analysts led by Joaquín Bagues wrote in a note. “Net reserves are hovering around US$6.08 billion, so this first phase of the programme would consume 16.4 percent of this scarce stock.”
Argentina’s Economy Ministry is using dollars held by the Treasury to fund the buyback, including money it expects to save from energy imports it presumes it won’t need in 2023, according to people with direct knowledge of the matter, who declined to be named. The buyback is seen affecting Argentina’s gross reserves, but not its net reserves, the people said.
The move would mark the first major action by the government on the country’s global bonds since US$65 billion of notes were restructured in 2020. Its bonds have been trading in distressed levels since then, but prices have almost doubled in recent weeks from an October low of 19 cents on the dollar.
“The decision would be justifiable if Argentina had excess reserves — but that’s not the case. International reserves currently stand at US$42.9 billion and have long been running below the the IMF’s recommended level. Voluntarily disposing of US$1 billion is a risky bet on sustainable improvement in commodity prices and international liquidity," said Adriana Dupita, Latin America economist for Bloomberg.
Argentina is trying to comply with the government’s US$44-billion agreement with the International Monetary Fund, build international reserves and battle annual inflation near 100 percent ahead of this year’s presidential elections.
“It’s hard to believe that the IMF has signed off on this, or maybe they haven’t and Argentina is going forward with it anyways,” said Edwin Gutierrez, head of emerging-market sovereign debt at Abrdn in London. “There’s no way Argentina will overshoot their reserve accumulation target in the short term.”
Drought risks
Massa added on Wednesday that an ongoing drought is impacting the government’s economic forecasts included in its 2023 budget. Without providing specifics, he said Argentina would need to import less energy than projected in the budget.
The country’s key export crop, soy, is facing the prospect of its worst harvest in 14 years as drought-stricken farmlands anticipate poor yields. That outcome would risk shaving 1.8 percentage points from gross domestic product, according to estimates last week from the Buenos Aires Grain Exchange.
Before Wednesday’s announcement, economists surveyed by Argentina’s Central Bank last month had projected economic growth would slow to less than one percent this year from over five percent in 2022 amid the drought and election uncertainty.
Local woes
At the same time that Argentina is seeking to buy back some of its foreign currency bonds, trouble is brewing in the local debt market.
Local investors have been unwilling to roll over their holdings of peso denominated debt amid fears soaring inflation is making the country’s CPI-indexed peso debt unsustainable, raising speculation that the government will be forced to default later this year.
A peso debt auction on Wednesday will serve as a litmus test for local investors’ willingness to fund the government in 2023, indicating just how close a possible default may be. The results should be known before the end of the day.
The Treasury is seeking to refinance around 365 billion pesos (US$2 billion) in local notes and bonds, with about 86 percent of the total maturities held by the private sector, according to Portfolio Personal Inversiones.
If Argentina doesn’t roll over the full amount, it will need to cover any shortfall through money printing, further fuelling inflation and increasing pressure on the government to devalue its official exchange rate, according to Javier Casabal, a fixed income strategist at Adcap Asset Management in Buenos Aires. That in turn adds to pressure for a reprofiling of the debt later this year.
“If Argentina doesn’t manage to refinance its local debt, the market will start to get nervous, and we could see more pronounced redemptions from mutual funds,” Casabal said. “There are already redemptions, but for now, everything is still manageable.”
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by Scott Squires & Patrick Gillespie, Bloomberg
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