Argentina could return to the global bond market next year to refinance debt as the government of President Javier Milei works to restore investor confidence with efforts to slash the fiscal deficit, rein in high inflation and rebuild international reserves, analysts said.
“Argentina could perfectly well sell bonds in the international markets in 12 to 18 months to refinance maturities,” Nicolás Parrondo, executive vice president of Argentine brokerage Cohen, said Thursday at the Forbes Money & CFO Seminar in Buenos Aires.
Argentina has been priced out of the cross-border bond market after defaulting on more than $100 billion of debt in 2019 and 2020. While the previous government restructured the bonds, a lingering financial crisis has pushed up the sovereign’s borrowing rates to prohibitive levels, leaving it reliant on the local market and multilateral lenders for limited amounts of financing.
But optimism about the country’s return to financial health has been growing among investors since Milei, a right-wing economist, took power in December. His program of economic shock therapy, including the layoff of state workers, cuts in pensions and hikes in utility tariffs, is helping to reduce inflation and narrow the budget deficit — and has sparked a rally in bond prices.
“Argentina has gone from a situation of panic to a new expectation of how we are going to accommodate the macroeconomic variables,” Parrondo said.
To return to the global markets, however, Milei must continue to shore up credibility in Argentina by chalking up more results, a process that begun with a decline in inflation from 25.5% month-over-month (211% annual) in December to 11% in March (288% annual).
The country has met the targets set by its main lender, the International Monetary Fund, by an “important” margin through March, Rodrigo Valdés, the lender’s Western Hemisphere director, said Friday during a press conference.
The next win could be the rebuilding of international reserves from a net-negative level to nearly $10 billion net-positive by the middle of this year, helped by exports from a large agriculture harvest, added Parrondo.
Pablo Castagna, director of wealth management at Balanz, another local brokerage, expects conditions to improve so that Argentina can once again sell bonds abroad. He said, for example, that the exchange rate has stabilized at under ARS1,000 per dollar on the parallel market compared with ARS1,200 in January, when it had been feared that the currency would reach ARS3,000 this year.
“Everything that has happened is very positive and optimistic,” he said.
THE NEED FOR REFORMS
Still, Castagna said that over the next three months or so, Milei must show progress in structural reforms, a challenge for his administration given it has only a minority of seats in Congress. Such reforms are key for providing clear and stable rules to attract investment and financing, and putting an end the frequent ups and downs in the economy, he said.
The reforms would also help Argentina regain access to international debt markets by slashing the sovereign’s borrowing costs, Castagna said.
Argentina would pay an eye-watering yield of 20% if it were to sell a bond today, he said.
That is way more than the 5% to 6% that neighboring countries such as Brazil, Chile and Uruguay pay to raise debt, Castagna said. It also well above the 8% paid by Turkey, Egypt’s 10%, El Salvador’s 12% and Pakistan’s 14%.
With reforms and political stability, Argentina should be able to borrow at 10-15% and maybe even less, Castagna said, which would push up sovereign bond prices by 20% to 40%, depending on the maturity.
“We are optimistic about what is happening,” he said.
Federico Mac Dougall, a partner at Deloitte’s financial advisory team in Buenos Aires, warned, however, that while there are a lot of expectations for Argentina’s return to the global markets, much still hinges on getting reforms passed. This has “put on the brakes a little bit” for investors, he said.
Even so, Mac Dougall said that instead of companies or investors calling to find out how to exit Argentina, they are now curious about what is happening in the country. That could translate into new investments if the structural reforms are passed, he added.
Investors, for the most part, are waiting to see the changes pan out over the next three to four months, but the expectations are positive, Mac Dougall said.
“It appears that things are going better than we had all expected,” he said.