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Argentina races to sell new dollar bonds

Argentina is looking to sell up to $10bn of debt, taking advantage of calmer conditions across bond markets and a pullback in the US dollar.

The year-old government of Mauricio Macri is just one of a host of other emerging markets, including Brazil, Saudi Arabia and Nigeria, all racing to raise finance soon to mitigate risks stemming from the uncertainty over the direction of US policy, with Donald Trump set to be sworn in as US president later this month.

The election of Mr Trump in November sparked hefty selling across emerging markets, with sentiment rattled by his talk of trade protectionism. A stronger US dollar and higher bond yields also sapped appetite for EM.

“Argentina wants to be pre-emptive and issue as soon as they can, even before Trump is in office, so they have a cushion to play with for the rest of the year. What they are trying to do is smart,” says Jorge Piedrahita, chief executive of Torino Capital, a broker-dealer in New York.

Luis Caputo, finance minister, said last week that Argentina’s financing needs total $22bn this year, with interest and amortisation payments adding another $21bn.

He did not specify how much Argentina needed to raise from the market, but said that the government was talking to several international banks about an imminent transaction whose size would depend on demand.

Mr Piedrahita added: “If they can raise $10bn they will,” arguing that Argentina’s 2017 financing needs lie “easily north of $30bn”, including provinces and the private sector.

With financing requirements that are greater than most of its peers, regional political pressures in Argentina could also undermine attempts later in the year to tap the markets, with important legislative elections in October that will determine the future of Mr Macri’s market-oriented reform programme.

Patrick Esteruelas, head of research at EMSO Asset Management in New York, pointed out that there was likely to be a flurry of issuance from emerging markets in January, with Brazil, Honduras, Nigeria, Egypt, Saudi Arabia and the Philippines all sounding out investors.

The risk of higher funding costs and a less benign market environment means that it makes “perfect sense” to front-load as much hard currency issuance as possible, Mr Esteruelas said.

Although Argentina’s foreign debt burden remains relatively low, at about 33.5 per cent of gross domestic product, according to Credit Suisse, Mr Macri’s continued reliance on foreign creditors to finance a difficult transition away from a decade of populist economics has weighed on market sentiment in recent weeks.

Argentina was one of the most heavily penalised emerging market credits after Mr Trump’s election victory, and concerns remain that investors may struggle to digest another year of bumper debt issuance from Argentina after $22bn of sovereign bonds last year, and $34bn in total, including provinces and the private sector.

Other investors are more optimistic, pointing to growing signs that Argentina’s economy is finally rebounding, after a 2 per cent contraction in 2016, as well as a historic tax amnesty that has already seen Argentines declare some $100bn held in offshore accounts.

“Too many people drank the kool-aid way too quickly and without reservation,” says Mr Esteruelas, referring to the market euphoria over Argentina’s triumphant return to the capital markets earlier this year after its protracted absence following a catastrophic debt default in 2001.

“But just as the market was guilty of being excessively optimistic about Argentina last summer, now it has become excessively pessimistic,” he added.

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