Article / 22 March 2017 at 11:00 GMT

Weekly Bond Update: Argentina striving for past glory — #SaxoStrats

Fixed Income trader / Saxo Bank
Denmark
  • Macri government increasing international confidence in Argentine economy
  • Buenos Aires stamps out corruption, launches business-friendly policies
  • New statement from Moody's indicates Argentina may be primed for an upgrade

Argentina
The National Congress, Buenos Aires: Argentina's Macri government is making all of the right efforts to overturn the country's shaky fiscal reputation. Photo: Shutterstock

By Michael Boye

We are a little more than a year into Mauricio Macri's presidency and optimism is running ever higher that his "let's change" coalition could see the once-dominant Argentine economy return to prosperity and growth.

Although the trend is not yet evident from the dry figures – the Argentine economy is believed to have regressed in 2016 and inflation still runs stubbornly high – the new administration has made significant progress in transforming the old corruption-plagued and protectionist economy, laying the foundations for more business-friendly policies to spur future growth.

However, there is one area where progress has been more profound and that is the improvement of the international ties necessary for restoring confidence among global investors. 

The new president knows that the foundation of any economic recovery is access to risk capital, and that international confidence and investment will be key to lowering borrowing costs and accelerating growth in Argentina.

The Argentine CDS spread (the cost to insure against default) has been contracting:
CDS spread
Source: Bloomberg

Among the new administration's biggest achievements in this area is the resolution of the technical default and 15-year-old dispute with holdout investors – a legacy from the debt restructuring that followed the initial 2001 default – and the country's subsequent return to international bond markets in 2016. 

This has allowed the government to tap USD markets several times, most recently in January 2017 when it issued new five- and 10-year bonds at 5.25% and 6.875% respectively. This was testament to strong underlying demand as the so-called reflation trade following the election of US president Trump led to rising interest rates in the US and selling pressure in Latin American bonds.

The change in attitude towards investors and business hasn't gone unnoticed at Moody's, which this month lifted the outlook for Argentina's B3 credit rating outlook to positive – often a solid indicator of an imminent upgrade. The credit rating agency cited Argentina's "improved policy stance" as well as the new government's commitment to reducing inflation and fiscal consolidation. 

More curiously, and confirming the shift towards more investor friendly policies, Moody's even acknowledged that the new government has "reversed the prior government's practice of misreporting basic macroeconomic data"!

New Argentine USD bonds have shaken off Trump-induced losses, but still trade below par:
Argentina new bonds
Source: Bloomberg

The statement goes on to applaud Argentina for actively courting international investment; one major component of this process, of course, is the "world tour" that president Macri has embarked upon this year. The tour began last month with the first official state visit to Spain since 2009, and will later this year see planned visits to China, Japan, and the United States.

Trust, however, can take years to build and only seconds to break, and there are few places where this holds more true than in international capital movements. Memories of the 2001 default, the contempt for international capital exhibited by previous governments (which eventually led to a second default in 2015), as well as years of fiscal irresponsibility will stay with investors for years, so while there many positive signs, Argentina's journey to restore confidence has just begun.

Buenos Aires
New construction along the Buenos Aires waterfront: given the troubles of the past, Argentina's return to fiscal probity will likely be long and met with some scepticism. Photo: Shutterstock

— Edited by Michael McKenna

Michael Boye is a fixed income trader at Saxo Bank

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