Upgrade to Lebanon Levels Shows Fernandez Paying Premium: Argentina Credit
Argentina’s second credit-rating increase in the past two months means its bonds are now trading at a 2.5 percentage point discount to its new peers.
Argentina bonds yield about 250 basis points, or 2.50 percentage points, more than the average borrowing costs on dollar debt from Ghana, Lebanon, Dominican Republic and Belize, according to JPMorgan Chase& Co. indexes. Standard & Poor’s boosted Argentina’s credit rating one level to B yesterday, putting it on a par with those countries.
While the South American nation’s bonds will likely rally today after the rating increase, the debt will continue to yield more than its peers as increasing government spending and accelerating inflation may cause the economy to overheat, said Jim Craige, who helps manage $12 billion of emerging-market assets at Stone Harbor Investment Partners in New York.
“Argentina does deserve to have a premium and that’s not going to change anytime soon,” Craige said. “This is a country with still very high inflation. You’ve also seen rapid growth in fiscal spending.”
S&P raised the South American nation’s foreign and local debt ratings one level to B, five steps below investment grade, saying the country’s “strong” economic expansion is helping it make debt payments. The increase matches a move made by Fitch Ratings in July, one month after President Cristina Fernandez de Kirchner restructured $12.9 billion of bonds remaining from the country’s default in 2001.
“The combination of a strong economic recovery in 2010 supported by favorable external conditions that are expected to persist over the medium term should ease rollover risk,” S&P, which predicts growth of 7 percent this year and 4.5 percent in 2011, said in a statement. The government “has been able to reduce debt levels in terms of GDP and improve its debt maturity profile in recent years,” S&P said.
The central bank forecasts Argentina’s economy will grow as much as 9.5 percent in 2010, the most since 1992, amid surging commodity exports.
“Argentina is in a very sweet spot,” said Edgardo Sternberg, an emerging-market debt strategist at Boston-based Loomis Sayles & Co., which manages about $140 billion in assets. “It’s exporting commodities like crazy and there’s a lot of demand for that. Prices are very high and that market is very, very attractive.”
Government spending in July rose 36 percent in the past year to 36.6 billion pesos, according to the most recent data from the Economy Ministry. The government reported last month that annual inflation rose to 11.2 percent during July, less than half the 25 percent estimate from Fausto Spotorno, an economist at research firm Orlando Ferreres & Asociados SA.
Economists and government officials including Vice President Julio Cobos have questioned the accuracy of the consumer price index, saying officials have underreported price increases since January 2007, when former President Nestor Kirchner made personnel changes at the statistics agency.
The extra yield investors demand to own Argentina dollar instead of U.S. Treasuries shrank 22 basis points to 695 at 5:20 p.m. New York time, according to JPMorgan’s EMBI Global index.
The yield on benchmark 7 percent due in 2015 fell 29 basis points to 10.46 percent, according to Bloomberg market average pricing.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps slid 36 basis points to 814, according to data compiled by CMA DataVision. Credit- default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.
Warrants linked to growth in South America’s second-biggest economy rose 0.2 cent to 11.20 cents, according to data compiled by Bloomberg.
The peso was little changed at 3.9455 per dollar.
S&P and Fitch rate Argentine foreign debt one level above the equivalent B3 rating that Moody’s Investors Service assigns to the securities. Moody’s hasn’t changed the rating since 2005, when the country reached an initial restructuring settlement following the 2001 default on $95 billion of bonds.
“This year I don’t see room for further upgrades,” Stone Harbor’s Craige said.