Monday, March 14, 2016

New debt to be issued at high interest rates

A man walks past a currency exchange house in Buenos Aires earlier this month, when the US dollar jumped to more than 16 pesos before the government was able to bring it down to previous levels.

By Ignacio Portes
Herald Staff

Country’s bond yields of 7 to 8 percent among the highest in the region

President Mauricio Macri’s government is getting ready to issue a sizeable dollar-denominated debt at high interest rates.

Although the rates that global markets offer have improved in the last few months, they are still high when compared to neighbouring countries.

Despite that, the country’s low debt-to-Gross Domestic Product (GDP) ratio makes the issuance the most attractive alternative for the national administration, which believes it would otherwise have to opt for painful austerity policies.

Rates for Argentina are between seven and eight percent according to market estimates, more than the rate Brazil secured on Friday for a US$1.5 billion issue despite its crippling recession. The struggling Mercosur trade partner sold its bonds at a 6.1 percent annual interest rate, the most costly issuance in the last seven years, far above the 3-4 percent rates it had got used to.

Chile, meanwhile, sold US$2.5 billion in bonds earlier this year at rates between 2-3 percent, while markets offer Peru four percent yearly rates for a currency loan.

Economists consulted by the Herald said that although markets hold a positive view of Macri’s recent reforms, the large amount of debt it is planning to issue means that it might be hard to market lower yields, as appetite for Argentine bonds has a limit.

“I don’t think rates will get much better unless something big happens globally. I think Argentina’s first issue to pay the holdout bondholders will be at that rate and only then — when markets see that the country has overcome that obstacle — the rates could improve,” Miguel Kiguel from the EconViews consultancy agency told the Herald. “But investors will want to make sure that the country has a sustainable financial programme and that the initial issues are successful,” he added.

Big supply, big demand

With the bill needed to reach a settlement with “vulture” creditors moving forward in Congress, the federal administration, several provinces and private companies are all moving quickly to issue debt, as the nation nears the moment when it will no longer be considered in default of debt.

But the large queue of Argentines looking for dollar loans is raising fears that demand might be too much for the market to absorb.

The Buenos Aires province was the first to issue a seven-year bond for US$1.25 billion last week with a yield above 9 percent, anticipating the jumbo deal expected from the federal government, which is planning to issue at least US$10 billion.

Although the federal administration should get a slightly better rate than the province, analysts agreed that the rate accepted by Governor María Eugenia Vidal was an indication of the market’s limits.

“It was an expensive deal. What’s happening is that there is a big need to issue bonds at the beginning. Argentina is demanding a lot, it might need US$22 billion this year, which is about twice what bigger countries such as Mexico or Brazil issue normally,” Marina Dal Poggetto from the Bein & Associates consultancy agency — which advised runner up Daniel Scioli during last year’s presidential campaign — told the Herald.

But the task ahead is not impossible, in her view. “In the longer term, supply might also improve. I think non-speculative investors with mid-term investment strategies could come in. Argentina is one of the few country’s offering high rates in the world, there’s not many other places in the world for investors to go if they want high returns. Only very risky ones such as Ukraine or Venezuela. So that money will be looking at Argentina as one of the most attractive destinations,” Dal Poggetto argued.

Kiguel agreed. “Testing whether there’s enough investors interested in Argentina is going to be a long process. The country’s debt programme is big. But it is not unachievable. Two years ago, the country issued US$6 billion in bonds to pay Repsol for (the nationalization of state-controlled energy company) YPF, and markets were happy to take it,” he said.

Growth needed

The golden rule of thumb to measure the sustainability of a country’s debt usually comes from comparing its gross domestic product (GDP) with its debt levels.

According to Dal Poggetto that means that, under stable financial conditions, one would have to look at the rates at which GDP is growing and compare it with the rate it is paying for new debt. If the interest rates are much higher, then the debt might become unsustainable in the long run.

But Argentina’s low foreign indebtedness levels mean that taking on new debt might still be reasonable even if the rates are expensive, she thinks.

“Taking on debt is not enough to bring on development but it is necessary in this context, after years of lowering debt levels. There are fiscal imbalances in the country that debt can allow to correct gradually. Recapitalizing the Central Bank is important too,” Dal Poggetto said.

But “issuing debt will be problematic if it’s the government’s sole strategy,” she thinks, arguing that balancing the budget will prove to be difficult while it is hit by tax cuts and a borderline recession. “It is hard to see where growth will come from. The best bet seems to be primary exports, because the country now has what it lacked between 1930 and 1995: the capacity of sowing in land that was previously unused.”

@ignacioportes