Smallest Peso Decline in Three Years Drive Bond Returns: Argentina Credit

Argentina’s record soybean harvest is helping the peso post its smallest decline in three years.

The peso’s 4.6 percent drop against the U.S. dollar this year is almost half its decline in 2009 and compares with an 8.8 percent tumble in 2008, according to data compiled by Bloomberg.

The smaller drop is helping President Cristina Fernandez de Kirchner prevent inflation that’s running at about 25 percent from accelerating further and is preserving dollar-based returns on peso debt. The 15 percent advance in local bonds compares with a 14 percent return for Brazilian debt and a 6 percent gain for Russian notes, according to JPMorgan Chase & Co. A 55- million metric ton soybean harvest prompted analysts to pare their peso forecasts to the most bullish in almost two years.

The peso “anchors inflation expectations,” Boris Segura, a Latin America economist at Nomura Securities International Inc., said in a telephone interview from New York. “The only way they can signal some sort of control over inflation is to keep the exchange rate relatively flat.”

The central bank buys dollars in the foreign-exchange market to weaken the peso in an effort to bolster exports, a policy that helped push foreign reserves to a record $52.3 billion on Nov. 19. It bought $9.6 billion this year through October, up from $3.3 billion in all of 2009.

Press officials at the central bank didn’t respond to messages left by Bloomberg.

Goldman Sachs Group Inc. estimates inflation is about 25 percent, more than the government’s 11.1 percent rate. Private economists and politicians say the government has underreported inflation since early 2007, when then-President Nestor Kirchner, Fernandez’s late husband and predecessor, named a political appointee to head the agency that measures consumer prices. Fernandez says the data is accurate.

Reelection

Fernandez will limit peso losses next year to stop inflation from quickening as she seeks reelection, according to Royal Bank of Scotland Group Plc.

Kirchner, who died in October, said in July that either he or Fernandez would run for president in next year’s election.

“It’s a matter of wanting to get reelected, and inflation is really a shot in the foot,” Flavia Cattan-Naslausky, a currency strategist at RBS in Stamford, Connecticut, said in a telephone interview. “Anything outside of gradual, engineered depreciation is too risky for the authorities.”

The currency will slide to 4.02 per dollar by yearend, from 3.9866 yesterday, and drop to 4.3 by December 2011, according to the median forecast of 13 analysts surveyed by Bloomberg. In August, the analysts predicted a decline to 4.2 per dollar by yearend and 4.65 by the end of 2011.

‘Still Negative’

The peso’s decline this year is the biggest among the six most-traded Latin American currencies, according to Bloomberg. It has weakened 29 percent since Kirchner began his four-year term in May 2003. In addition to requiring investors to deposit cash at the central bank, the government has also limited gains by maintaining caps on utility prices and taking over companies and private pension funds.

“The fact that it’s underperforming tells me that people are still negative on the peso,” Win Thin, global head of emerging-markets strategy at Brown Brothers Harriman & Co. in New York, said in a telephone interview. “I could see that continuing next year. Most investors are not happy with economic policies under this president and the previous president.”

The extra yield investors demand to hold Argentine dollar bonds instead of U.S. Treasuries narrowed 18 basis points, or 0.18 percentage point, to 529 at 3:27 p.m. New York time, according to JPMorgan.

Default Swaps

The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 38 basis points to 701, 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 its debt agreements.

Warrants linked to economic growth climbed 0.08 cent to 13.24 cents today, according to data compiled by Bloomberg.

The peso was little changed today at 3.9855.

Eduardo Suarez, an emerging-markets strategist at RBC Capital Markets in Toronto, predicts the peso will end the year at 3.95 per dollar and weaken to 4.1 by the end of 2011.

“We see the Argentine peso as one of the more stable currencies,” Suarez said in a telephone interview. “Argentines are quite sensitive to big moves in the peso and they take those negatively, so the government, especially now that there are elections next year, would, in our view, be quite averse to allowing large depreciations in the Argentine peso.”

To contact the reporters on this story: Ben Bain in New York at bbain2@bloomberg.net; Camila Russo in New York at crusso15@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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