Argentina: repercussions of the repurchase of US$ 1,000 million in sovereign bonds

The US$16.1 billion in international bonds of the South American nation due 2030 they rose as much as 3.2 cents to more than 36 cents on the dollar, the highest level since October 2021, before cutting profits. It is these bonds, plus those that mature in 2029, that the Government plans to repurchase, reported the Economy Minister, Sergio Massa, without giving details. The central bank will direct the process.

For investors, the key question is where the money comes from, analysts at Personal Portfolio Investments led by Joaquin Bagues. Net reserves are around US$6.08 billion, so this first phase of the program would consume 16.4% of this scarce stock, they said.

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The Ministry of Economy of Argentina it would use dollars held by the Treasury to finance the buyback, including money it hopes to save from energy imports it estimates it won’t need in 2023, according to people with direct knowledge of the matter. The buyback would affect Argentina’s gross reserves, but not net reserves, the people said.

The buyback would mark the first major move on the country’s global bonds since a $65 billion debt restructuring in 2020. Its bonds have traded at distress levels ever since, but prices have nearly doubled in recent weeks from a low of 19 cents on the dollar in October.

What Bloomberg Economics Says

“The decision would be justified if Argentina had an excess of reserves, but it is not the case. International reserves currently stand at US$42.9 billion and have long been below the level recommended by the IMF. Voluntarily parting with US$ 1,000 million is a risky bet for the sustainable improvement of the prices of raw materials and international liquidity”, said Adriana Dupitaeconomist for Latin America.

Argentina tries to comply with the US$ 44,000 million agreement signed by the Government with the International Monetary Fund, accumulate international reserves and fight annual inflation close to 100% before the presidential elections this year.

“It’s hard to believe that the IMF has given the go-ahead, or perhaps hasn’t, and Argentina is going ahead anyway,” said Edwin Gutierrezhead of emerging markets sovereign debt at Abrdn in London. “There is no way for Argentina to exceed its near-term reserve accumulation target.”

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Drought risks

Massa added on Wednesday that a drought is affecting the government’s economic forecasts included in its 2023 budget. Without giving specific details, he said Argentina will need to import less power than projected in the budget.

The country’s main export crop, soybeans, faces the prospect of its worst crop in 14 years as drought-stricken farmland anticipates poor yields. This could cut 1.8 percentage points of the gross domestic product, according to estimates published last week by the Buenos Aires Grain Stock Exchange.

Before Wednesday’s announcement, economists surveyed by Argentina’s central bank last month projected economic growth to slow to less than 1% this year from more than 5% in 2022 amid drought and election uncertainty.

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local problems

At the same time that Argentina plans to buy back part of its foreign currency bonds, problems are brewing in the local debt market.

Local investors have been reluctant to refinance their peso-denominated debt holdings fearing rising inflation will make the country’s CPI-indexed peso debt unsustainable and increase speculation that the government will be forced to default on its obligations by the end of this year.

A debt auction in pesos will serve this Wednesday as a litmus test for the willingness of local investors to finance the Government in 2023, indicating how close a possible default may be.

The sale is the first test of the new year for the government to increase participation among private investors in local debt auctions. The Treasury seeks to refinance around 365 billion pesos (US$2 billion) in local bills and bonds, with around 86% of the total maturities in the hands of the private sector, according to Portfolio Personal Inversiones.

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According to Javier Casabalfixed income strategist at Adcap Asset Management in Buenos Aires, if Argentina does not refinance all of its debt, it will have to cover the deficit by issuing money, which will further fuel inflation and increase pressure on the government to devalue its official exchange rate. This, in turn, increases the pressure for a reprofiling of the debt at the end of this year.

“If Argentina fails to refinance its local debt, the market will start to get nervous and we could see more pronounced bailouts from investment funds,” said

The sale will take place from 10 am to 3 pm local time, with a second round of auction on January 19.

uneven closing

Argentina’s financial market closed on Wednesday with mixed trends in response to portfolio rearrangements, after the economy minister announced the repurchase of foreign debt and the central bank raised the repo rate by 200 basis points.

Sovereign bonds continued their upward price climb, while the stock market fell sharply due to profit taking and the exchange market was more relaxed due to a drop in alternative dollars.

“The buyback announcement could have associated side effects, especially in the dynamics of the scarce BCRA reserves, accentuated after the drought, for which it will be important for investors to know the details about its implementation to assess its sustainability”, said Gustavo Ber, from the Ber studio.

The loss of net income of the agricultural producers sector amounts to US$ 10.425 million only from three crops and could worsen if the rainfall deficit continues, estimated the Rosario Stock Exchange (BCR).

For its part, Portfolio Personal Inversiones pointed out that “the real question here is about the firepower of Massa’s team. Where will the funds for the program come from? Net reserves are around US$ 6,080 million, so the first phase of this program represents 16.44% of this scarce stock.”.

Analysts agree that these measures aim to control the alternative exchange market through which dollars are obtained by buying bonds in pesos and selling them in dollars.

“Although there are still issues to be defined, in the long term these measures have little effect if there are no prior reserves, a good flow of settlements in the foreign exchange market or a primary surplus.”, pointed out Roberto Geretto, from Fundcorp.

“Apparently the measure aims to contain the rise of the (dollar in the alternative places) CCL (counted with liquidation), which would also explain the rise in the rate of BCRA passes,” he said.