Emerging Markets Bonds
The date for a new presidential administration in Argentina is fast approaching. We take a closer look at the possible policy shifts by the incoming administration and the effects they may have on the country’s debt markets.
Generally, and as expected, it is positive that the Argentine presidential election was decided in the first round, so that the future administration does not have to function in an election-mode, but can focus fully on the transition and ultimately on the handover in December 2019. President-elect Alberto Fernández has already met with President Mauricio Macri to begin planning the transition. Although the two have had a poor relationship in the past, both seem committed to work towards a smooth transition, which is a good overall sign.
Alberto Fernández has already approached a few key people for the transition. Some of them are very close to the president-elect, with a moderate center-left orientation. However, more people will be appointed to manage different areas soon, which will be important to analyze. Therefore, we are keeping both eyes on the situation and any relevant news. However, a few names have already been leaked to the press, among those names we would pinpoint the following people:
If confirmed, we think that Cristina Fernández de Kirchner’s touch is quite “palpable” and that Mr. Kulfas and Ms. Marcó del Pont are a cause of concern for us. Mr. Kulfas recently said that a bit of debt monetization should not be inflationary and Ms. Marcó del Pont is known for having imposed currency controls and wasted currency reserves at a record pace during her tenure (she was even sacked by Cristina Fernández de Kirchner in 2013). This is indicative of the direction of Alberto Fernández’s future policy plans, which will likely be heterodox, meaning that he and most of the individuals appointed share the view that the state should play a larger role in the economy than in the previous administration. At least the economic team is comprised of experienced members who, however, are generally not regarded as “heavyweights”, meaning that their views are unlikely to weigh heavily on markets.
In Argentina, the transition to the new presidential administration is likely to take some time, as will the renegotiations with the International Monetary Fund, and possible subsequent negotiations with private debtholders. Based on our experience on the time that friendly negotiations generally take, we favor very short-term (but still cheap) debt. As most Argentinian sovereign paper is trading in the low forties, we see it as rather attractively priced.
The problem with local debt is the 21 billion US-dollar wall of redemptions for 2020. Our main concern is that the new administration may choose to finance these redemptions by printing money, rather than by keeping a fiscal grip. All options are still on the table and we should be prepared to deal with rumors and fake news for a while. However, our base-case scenario would be a big debt swap, in which all or most of the peso-denominated local bonds (especially the ones maturing in 2020) would be tendered against a small number of new “re-profiled” bonds with low coupons and long maturities. In that case, our preference goes towards the inflation-linked bonds with a longer-than-2020 maturity, a low coupon, and a low parity cash price.
In the corporate bond space we are closely following provincial bonds and the utility sector.
The utility sector benefits from long-term power purchase agreements (PPA) denominated in US dollars. These PPA’s were put in place by the Mauricio Macri administration under very beneficial terms for the power producers. This was needed in the first place to attract investment, as Argentina has big power supply needs. Our base case is that the incoming administration will adjust the PPAs, but we do not expect them to push the companies into default.
Regarding the provinces, most are in a much better shape than the sovereign, even though their fates are linked to a certain extent. Recently, the stronger provinces have rebounded (Cordoba for example) and are almost back at similar trading levels as before the primary elections (PASO). On the other hand, the weaker provinces (such as the Province of Buenos Aires) have not rebounded much. While Buenos Aires is a weak province and likely to restructure, the trading levels of the bonds are mostly below the trading prices of the sovereign, making them a focus for us.
This is our current view and outlook on Argentina. As we have done pre and post the Argentine elections, we will continue to inform you on market relevant events in Argentina.