Initially, the consultancy firm recalls that dollar bonds have been one of the “star” alternatives that climbed 75% in dollars between November 2023 and last April. “But in recent months, these instruments have been ostracized by a series of market doubts regarding, no longer the willingness, but the ability to pay,” they explained.
“Probably the most novel aspect of the current administration’s macroeconomic scheme is the commitment to have orderly public accounts. The primary surplus for the first half of the year is estimated at 1.1% of GDP, while the financial surplus is estimated at 0.4%. It should be noted that 2023 closed with a primary deficit of 2.7% of GDP, and 4.4% once interest is added,” they explained.
The President and the economic authorities have indicated that the financial surplus is non-negotiable. This conviction, recognized by the market, continues to be the main anchor of the program and a driving force that supports bond prices.
2. REPO
In recent weeks, economic authorities have made various announcements to allay doubts about the upcoming payments of hard dollar bonds. In principle, in mid-July The Treasury reported that it would buy dollars from the BCRA to cope with the January 2025 interest payment (USD 1.528 million). Also, a week later, President Milei reported that the capital maturities were also assured, since there was the possibility of a Repurchase Agreement (REPO) to finance the payment. Finally, in recent days, the Minister of Economy reported in a meeting that this instrument also would allow capital payments to be secured until January 2026 inclusive. At the same event, it was indicated that the dollars to pay the interest for July 2025 and January 2026 would be purchased during the first half of 2025.
In this regard, GMA analysts point out that the certainty of compliance with the next three payments is excellent news for hard dollar debt. “In particular, the shorter bonds, maturing in 2029 and 2030, are those that are most affected by the announcement. This is because, despite having a low coupon, the amortization of these instruments implies high payments for the next year and a half.”
3. US monetary policy
This week the FED decidedor maintain the reference interest rate in the range of 5.25% and 5.50%, andn line with what the market had discounted. The highlight, however, was that Jerome Powell declared that the authorities will cut rates at the next meeting in September if they observe a drop in inflation.
In fact, investors support this guidance: for the next meeting in September, the consensus assumes that there will be a rate cut of 25 bps. There is even a 70% implied probability that the cut will be 50 bps. By December, there is a 90% probability that there will be 3 or more cuts.
“This announcement brings some relief to emerging markets such as Argentina’s bonds. If the dovish message carries over to longer sections of the US yield curve, A reduction in the risk-free rate would imply a revaluation of all risk assets, including those of our country.“, they explained.
4. Money laundering favors bonds
The Government regulated the externalization of assets. Under this regime, taxpayers with up to USD 100,000 will be able to access a range of investments at no cost. Investments include the acquisition of public securities issued by the national, provincial or municipal government. Also shares, negotiable bonds and FCI.
In addition to adhering to this type of investment, a secondary alternative to avoid incurring in paying taxes is to credit holdings of up to USD 100,000 in a special account with time until September 30. The Government’s intention with this is clearly to recover dollar deposits, improve the stock of reserves and remonetize the economy with the money laundering. Beyond this objective, there could be demand from sovereigns to reduce the opportunity cost of holding money tied up.
Dollar bonds: why caution is needed
1. Exchange rate lag?
In June, the BCRA’s position in the exchange market became a seller’s position of almost USD 50 million. The fact that the monetary authority does not accumulate reserves generates uncertainty about how orderly the exit from the currency controls can be.
“The continuation of the crawling peg implies an inevitable appreciation of the real exchange rate, which leads to a less incentive for exporters to settle. Although the blend dollar (20% of exports to the CCL) improves the settlement exchange rate, it also implies a lower supply in the official exchange market, in which the BCRA can obtain dollars,” explained GMA.
“With a 55% gap, the BCRA retained 35% of the dollars purchased from the official exchange rate after sterilization. While, with a 38% gap, it retains 27%.”
2. Soybeans are the cheapest in years
Following the announcement of improved weather conditions in the US, the price of the oilseed broke through the floor of USD 380/tonne, the lowest in 4 years, while in real terms this value had not been seen since 2006.
This hits Argentine sustainability on two fronts:
– First of all, lowers the ceiling on exports and, therefore, compromises the accumulation of reserves. At the same time, the weakness of the international value removes incentives for producers to liquidate. The domino effect could impact on lower sales via CCL due to the blend scheme and, thus, reduce the financial offer and put pressure on the gap.
– In second instance, There could be an impact on government revenuewhich has been the essential and indisputable pillar to achieve market confidence.
This multi-faceted shock simultaneously removes external and fiscal sustainability, two crucial aspects to guarantee the repayment capacity of dollar bonds.
3. Uncertainty about returning to the market
Country risk: above 1,600 bps, the highest in 6 months, is synonymous with the fact that access to private financing is still prohibitive, GMA stated.
What needs to be done to issue debt that will allow oxygenating the horizon of commitments for next year? The roadmap should include a new plan with the IMF. This step would not only serve to roll over the USD 15 billion that must be paid to the organization in the remainder of this year. It would also lay the foundations for an economic policy scheme with the approval of the international community.
Strategy with dollar bonds
For analysts, “there is no asset class with a more attractive risk-return ratio in Argentina.” However, they point out that conservative investors should abstain or take on a small portion of risk (10%) in their portfolio.
“With Globales at USD 45, the market remains in “seeing is believing” mode. But when the view changes, the upside will be significantly smaller. Below, we present various scenarios that show a positive asymmetry on the side of the expected returns of hard dollar debt,” they concluded.
Source: Ambito
