BRIC-Beating Growth Sends GDP Warrants to Two-Year High: Argentina Credit
Speculation that Argentina is inflating economic growth above the rate of the biggest emerging-market countries is driving the value of securities linked to the nation’s expansion to the highest in 2 1/2 years.
The warrants, which pay debt holders when growth exceeds government projections, more than doubled since May to 12.73 U.S. cents, the highest since March 2008. The securities offer an implied yield of about 35 percent through the end of 2011, according to Bulltick Capital Markets, a Miami-based brokerage specializing in Latin America. By comparison, Argentina’s benchmark bonds due in 2015 yield 8.93 percent.
President Cristina Fernandez de Kirchner is projecting South America’s second-largest economy will grow 9.5 percent this year, more than the average of 7.9 percent for Brazil, Russia, China and India, the so-called BRIC nations. Former economy minister Roberto Lavagna, previous vice minister Orlando Ferreres and Vice President Julio Cobos say official estimates are overstated to bolster political support for the government.
“There’s a perception in the market that the government is overstating growth and for that reason it’s positive for the warrants,” Carola Sandy, an economist with Credit Suisse Group AG in New York, said in a telephone interview.
This year’s growth in Argentina is being driven by a record 55-million metric ton soybean harvest and wheat prices that surged 40 percent in the third quarter after Russia suffered through its worst drought in at least 50 years. From 2003 to 2008, Argentina’s economy grew an average 8.5 percent per year.
Argentina first created GDP warrants as an incentive to win over creditors in the 2005 restructuring of $95 billion in defaulted debt. In June, Fernandez issued more of the securities when she renegotiated $12.2 billion in defaulted notes held out of the 2005 offer.
The warrants, which mature in 2035, pay investors when growth is higher than 3 percent and the inflation-adjusted value of the country’s gross domestic product surpasses a base-case scenario in the contracts.
Argentina reported GDP increased 0.9 percent in 2009 and inflation of 6.3 percent, according to the statistics agency.
“There’s an underestimation of inflation and an overestimation of growth,” Siobhan Morden, an analyst at Royal Bank of Scotland in Stamford, Connecticut, said in a telephone interview. “I would say the underestimation of inflation is much worse.”
Economy Minister Amado Boudou’s press office didn’t return a call for comment.
Warrant holders received a payment of 3.11 cents on Dec. 15 after the economy grew 6.8 percent in 2008 and inflation was at 4.4 percent. Argentina will make no payment this year after 2009’s slowdown in growth, according to a government prospectus.
Fernandez’s estimate for 2009 was inaccurate since the economy likely contracted 4.5 percent, said Ferreres, who was economy vice minister in 1989 and now runs an economic research agency.
“In 2009, when we started to see a recession, the government didn’t publish it because they didn’t want to be unpopular,” Ferreres said in a phone interview from Buenos Aires. “If the economy shrank, they say the economy grew.”
Doubt about the accuracy of Argentina’s economic statistics may inhibit the country from having its debt rating raised in the “short term,” Gabriel Torres, an analyst with Moody’s Investors Service said Oct. 7 at an event in Buenos Aires. Moody’s rates the country B3, six levels below investment grade.
“If there’s something that would sum up the problem we have in raising the rating for Argentina, it’s the fact that there’s no confidence in the official numbers,” Torres said. “That’s something that doesn’t happen in other countries.”
While Fernandez’s administration reported that consumer prices rose 11.1 percent in September from a year earlier, Buenos Aires-based research firm Ecolatina estimates inflation was 25 percent. The company tracks the prices for about 5,000 goods and services.
Even if the government is overpaying warrant investors by exaggerating growth figures, that’s being offset by the inflation data, according to Leonardo Chialva, an economist at Delphos Investment in Buenos Aires.
“The main difference is in inflation and that is causing the government to save more than what it’s overpaying for exaggerating the GDP numbers,” he said.
The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries rose six basis points, or 0.06 percentage point, to 584 yesterday, according to JPMorgan Chase & Co.
Credit Default Swaps
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps rose 11 basis points to 732, according to data compiled by CMA. 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.
The peso was little changed yesterday at 3.9537 per dollar.
Argentina may restructure defaulted debt with the Paris Club group of creditor nations, Fernandez said in a speech in Berlin on Oct. 6, and may return to the debt markets.
“Growth has been kind of surprising on the upside with the debt reoffering, the Paris club repayment and the fact that they’re talking about returning to the debt market,” said Morden of RBS. “All of these support the GDP warrants.”
Argentina may expand by 8.5 percent this year and 5.5 percent next year, enough to trigger warrant payments in December 2011 and 2012, according to New York-based JPMorgan Chase & Co.
“Argentina’s growth is on track to outperform regionals and potentially outperform previous years,” said David Spegel, head of emerging-market debt strategy at ING Groep NV in New York. “That would make the GDP warrants attractive,”
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