President Mauricio Macri’s landmark move to agree a preliminary payment of $4.653 billion to holdout creditors has met with a strong show of support from regional investors.
Argentina’s President, who still needs to convince congress to end the 15-year dispute, marks the latest in several reformist moves made by Macri since coming to power last year.
The decision to agree a pay-out was met with a positive response from markets but is it all plain sailing for the LatAm nation? Citywire Selector’s sister site Citywire Deutschland canvassed regional experts and investments specialists to find out.
According to Dominic Bokor-Ingram, co-manager of the Charlemagne Magna New Frontiers fund, the re-entry to international capital markets is a huge step for a nation which has been out in the cold for a number of years.
The new administration of President Macri has achieved a number of landmarks post the 2015 election victory including lifting capital controls, unifying the FX market, reducing export taxes, increasing reserves, cutting energy subsidies, and providing a framework to reduce fiscal and monetary imbalances. From previous expectations of another year of falling GDP, it is now expected that GDP growth will be positive in 2016.
The biggest positive of the hold out deal concluding is enabling Argentina to borrow in the international capital markets again. This should certainly reduce the cost of borrowing for the government, but also enable corporates to reduce their cost of funding. It is expected that the deal will conclude in April this year and that Argentina will be able to begin to issue into the international markets shortly after that.
The equity market has responded very positively to this news with lower financing rates now largely priced in. We do however see another major potential for a positive re-rating of the market over the coming months. MSCI may put the country back on the review list for upgrade from Frontier to the Emerging Market Index by June this year. This could imply an upgrade by late next year, which could sustain the equity bull story given the subsequent inflows.
Hard work ahead but hope
Sandra Crowl, who sits on the investment committee at French group Carmignac, re-iterated claims the market could become a frontier favourite but said challenges still exist for Macri & co.
The deal with its creditors has paved the way for Argentina to regain access to international markets. Argentina will need to finance a colossal debt of around $15 billion to pay the holdouts now that an agreement has been reached. There is also a 5.8% fiscal deficit to finance, which is around $8 billion.
Bond auctions have been tabled for next month. After years of a cautious view on Argentina, we now believe that the country has a good chance to get back on track to becoming one of the most promising frontier countries over the next years.
In the meantime, Argentina will need to return to the international debt markets to access US dollars, even though efforts have been made to improve their foreign reserves and current account through lower export taxes and a 15% currency devaluation.
$15 billion is a large amount to finance but with a strongly reformist government it’s possible to regain investors’ confidence. The government will need to find subtle balance between keeping inflation under control and gradually reducing the fiscal deficit while avoiding an economic slowdown.