Category: Argentina

Argentina could encounter refinancing difficulties if market conditions deteriorate sharply, say Fitch. The country already has limited access to international capital markets. Increasing risk aversion, lack of credibility of inflation data and concerns about the sustainability of the current policy framework could limit access to local bond markets as well, says the agency. Fitch affirmed Thursday the country’s sovereign and long term local currency ratings at B. The ratings reflect the country’s twin surpluses and manageable financing requirements for the forecast period through a combination of intra-public sector financing, private placements and local issuances, it says. “A less favorable external environment combined with the structural limitations of the domestic economy is likely to weigh on growth prospects and erode the country’s twin surpluses in the forecast period,” notes Erich Arispe, a sovereign analyst at Fitch. The agency also maintains that Argentina needs to normalize relations with creditors in order to see its IDR moved out of Restrictive Default. The RD rating could be lifted if the sovereign were to offer a new, broadly accepted exchange deal for holdouts or if it resumes regular bond issues in international capital markets without incurring the risk that proceeds or debt service would be subject to rulings by foreign courts.

The median of consumer expectations for year-on-year headline CPI inflation over the next 12 months in Argentina is 20%, well above government estimates of 8.2%, according to the February Universidad Torcuato di Tella survey cited by Credit Suisse. This is the seventh consecutive month in which the survey has shown the expectation for inflation at 20%, well above the official data, according to the bank. “The fact that consumers expect inflation to be much higher than what the government currently reports partially explains why the labor unions in Argentina are calling for nominal wage hikes of about 30%,” says CS.

Petrobras Energia, the Argentinean subsidiary of Petrobras, has bought $300m of FRNs from Petrobras Internacional Braspetro with a July 2008 maturity, according to a filing with the Buenos Aires Bolsa. The transaction pays 30-day Libor plus 15bp. The Brazilian state-controlled oil company had to pull an international issue earlier in the week. A $500m tap of 6.125% 2016 notes was abandoned as pricing flared amid market unease.

Argentine ABS could see a boost from lease equipment, trade receivables and deals backed by diversified pools of corporate loans in 2008, according to Fitch. Future flows and transactions for infrastructure financing are also expected. A new resolution (RG 522) issued by the CNV is an important new development in the local legal framework, says Fitch. It dictates that all types of instruments issued under a financial trust through a public offering must have at least one rating. “This implies the agencies will have to rate subordinated certificates that generally are retained by the issuing trust and were not rated before the issuance of the RG 522,” says Fitch. “Another important development to look for in 2008 is the existence of a project of law that is being discussed in the Argentine Congress that would imply the elimination of tax exemptions for financial trusts involving static pools,” it adds. If the law is approved, its effect on existing and future transactions would have to be considered, since many structures can change in the future, Fitch concludes.

Argentina may be close to launching a new CPI that complies with international standards, according to BBVA. While that will not fix the distortions that come from price controls and government intervention in several industries, it could reintroduce the CPI as an effective tool in forecasting inflation. If the new measure complies with international standards, investor confidence would get a boost, increasing demand for Cer inflation indexed bonds. The shop examines the performance of six Argentine inflation linked bonds, the Pre 8, Pr 12, Bogar 18, Boden 14, Discount and Par bonds, and notes the yield differential between the Bogar 18 and Discs tightened following the CPI announcement Monday. Most economists following Argentina are skeptical of the official numbers as reported by INDEC, the economic statistics bureau, and have devised their own method to establish inflation. The rate is more than double what the government reports, at around 20%, say analysts.

Fitch says it is closely monitoring the medium term credit impact of a sizable increase in the City of BA’s debt that will follow the anticipated issuance of ARP1.6bn in debt. “The city’s capacity to manage this increased indebtedness will likewise be tied to its tax revenue performance and to the related economy performance,” says the agency. It rates the city B (stable) but will look carefully at the debt ratios following issuance. Debt /revenues ratio has declined from 32.7% in 2005 to 19% as of September, says Fitch. “Considering the new issue, Fitch anticipates that this ratio could reach a level of 26% in December 2008, unless recent tax measures yield higher tax intake,” it adds. Firm details of the deal, including currency, maturity, and speed of debt issuance, remain to be set. A maturity of at least 7 years is expected.

Argentina should be able to muddle through and cover its funding commitments for this year using Chavez and domestic markets. But crunch time is coming in 2009, according to a LatinFinance panel on Argentina’s economic and political future held Thursday in Miami. “The financial needs of the government are going to be higher next year and that will cause the government to tap the international markets,” says Martin Krause, professor of economics at ESEADE and the University of Buenos Aires. “In order to be able to go to the markets next year, they need to start solving the problems now, which is basically the Paris Club and the holdouts,” he adds. Claudio Loser, senior fellow at the Inter-American Dialogue, called the Argentina situation “totally unsustainable.” Other panelists said that President Cristina Kirchner’s initial hints that she may interested in resolving the holdout situation have waned, leaving investors less hopeful of an agreement any time soon. ATFA, the bondholder lobby group, plans to step up pressure through the US government, but it is unclear how fruitful this will be. In the past, the sovereign has ignored similar pressure, and bondholders lack a unified negotiating platform. Overall, it looks like the sovereign is free to coast on elevated soft commodity prices, at least for the short term. “Luck is still on the side of Argentina for now and for the foreseeable future,” says Pablo Morra, economist at Goldman Sachs.

The Chavez influence may be starting to wane in LatAm, according to participants at a LatinFinance panel on Argentina’s economic and political future, held Thursday in Miami. Rafael de la Fuente, chief LatAm economist at BNP Paribas, highlights Venezuela’s inability to keep the state oil company at arm’s length, along with an over reliance on oil as major problems. He adds a fixed exchange rate, food shortages and inflation to the list of woes and says oil could remain at current levels and the sovereign could still have a crisis. “This is going to end in tears,” says de la Fuente. “The writing is on the wall. When that goes, so does the influence that he yields. My perception is that influence is not long lasting.” Others say the Venezuelan people and other LatAm nations will see through Chavez as they align themselves increasingly with democracy. “Ultimately people will see that Chavez is not the way of the future,” says Nancy Soderberg, co-chair of ATFA. “Continued reliance on Chavez is a tarnish on the proud history of the Argentine people.” Soderberg, a former ambassador at the US mission to the UN, adds that Chavez is an annoyance but will lose support once the dominance in the region – and the world – of anti-Americanism fades. Panelists were unable to predict how long the Venezuelan president will last. “It could turn very quaickly,” says de la Fuente. “Whenever the time comes that oil is sustainably around $60 a barrel, add 12-15 months to that,” says Douglas Smith, chief economist for the Americas at Standard Chartered.