Argentine bonds rallied the most in emerging markets after the government unveiled a new inflation index that marks the most concrete sign it’s ready to move away from policies that have alienated investors for a decade.
Yields on government dollar bonds due 2017 sold under local law tumbled 1.55 percentage point to 14.5 percent at 3:44 p.m. in Buenos Aires, the biggest drop in more than 11 months. The price on the notes rose 3.33 cents to 83.84 cents on the dollar. Inflation-linked bonds surged the most on record.
While the government’s reporting of a 3.7 percent monthly surge in consumer prices in January shows the extent to which inflation has spiraled out of control, investors were encouraged that the country is recognizing the problem after denying it for seven years. The figure is more than three times higher than the monthly rate published a year ago.
“Argentina finally comes clean and prints a monster month-on-month inflation figure in compliance with the IMF,” Donato Guarino, a strategist at Barclays Plc said in e-mailed comments. “In this case, bad news is good news. A bad inflation number that will trigger a rally.”
Argentina has reported inflation figures below private estimates since 2007 when then President Nestor Kirchner overhauled staff at the National Statistics Institute. According to the government, consumer prices rose 10.9 percent in 2013, less than half the 28 percent increase estimated by private economists and published by opposition lawmakers. The discrepancy prompted the International Monetary Fund to censure the country for publishing inaccurate data last year.
The IMF said yesterday it had taken note of the new index and will review Argentina’s case by mid-May at the latest, according to deadlines it published in December.
Argentine bonds have returned 8.06 percent this month, the most among emerging markets, pushing the extra yield investors demand to own Argentine bonds instead of U.S. Treasuries down 1.36 percentage point to 9.49 percentage points, according to JPMorgan Chase & Co.’s EMBIG index. The spread narrowed 22 basis points today compared with an average decline of two basis points for developing nations.
The cost to insure Argentine bonds against non-payment in five years with credit-default swaps fell 1.01 percentage point to 23.2 percentage points at 1 p.m. in New York, the lowest in three weeks, CMA data show.
The new gauge covers more than 200,000 prices in 13,000 urban areas of the country and will replace the Greater Buenos Aires index, Economy Minister Axel Kicillof said yesterday.
“This marks a qualitative change from the past,” Kicillof said during a press conference in Buenos Aires. Due to changes in consumption habits, “it was urgent for us to change our inflation calculations. This is an X-ray of another country.”
According to the government’s new index, the rise in prices was led by health care, transport, entertainment and food, which rose 5.9 percent, 5.4 percent, 4.8 percent and 3.3 percent respectively.
Opposition lawmakers said at a Feb. 12 news conference that prices rose 4.6 percent in January and 30.8 percent in the past 12 months. The so-called Congress CPI lacks proper methodology and shouldn’t be taken seriously, Cabinet Chief Jorge Capitanich said yesterday.
“This was a positive step forward,” Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc., said in an e-mail. “The number came in the upper end of expectations.”
President Cristina Fernandez de Kirchner devalued the peso 19 percent in January in a bid to make exports more competitive and to stem dollar demand that drained foreign reserves to a seven-year low.
Locked out of international debt markets since the country’s record $95 billion default in 2001, the government is seeking to repair relations with the IMF, World Bank and the Paris Club of creditors to access new financing. Foreign reserves used to pay debt have tumbled 34 percent to near a seven-year low of $27.8 billion.
Argentina needs IMF approval to advance in negotiations to settle $6.5 billion of outstanding debt with the Paris Club of creditors. Kicillof, who traveled to Paris last month to meet officials representing the 19-country group, said Jan. 21 that an eventual agreement could help companies that are blocked from obtaining credit abroad.
Rapprochement with the Fund may also help improve ties with the U.S. and boost Argentina’s chances of having its case against holders of defaulted bonds heard by the U.S. Supreme Court, Eurasia Group’s Daniel Kerner wrote in a note to clients Feb. 10.
The previous official consumer price index had been disregarded as a parameter by workers negotiating raises. Wages have risen an average 24 percent annually over the past seven years, compared with average annual inflation of 9.4 percent.
A union representing workers employed by the state, including the Economy Ministry, is demanding a pay rise of 35 percent, according to a poster on a wall inside the ministry.
Former Interior Commerce Secretary Guillermo Moreno, who led the personnel overhaul of the statistics institute, fined private consulting firms in 2011 that published inflation estimates contradicting government data. To protect the economists, opposition lawmakers began publishing their surveys without naming them.
Relations between the IMF and Argentina deteriorated after the 2001 default. Kirchner, Fernandez’s predecessor and late husband, blamed the IMF “dictatorship” for leading the country into an economic crisis that culminated in the halt of payments.
Since canceling its $9.8 billion of debt to the IMF in 2006, the government hasn’t allowed the fund to conduct an article IV review of its finances, as it does in other member countries.
The number reported by the new index adds to other measures such as persuading farmers to sell their stock of soybeans that has been seen as positive by the market, said Hernan Yellati, the head of research at BancTrust & Co.
“The credibility that was lost after lying since 2007 won’t be won over with a single number but the first number does makes sense,” Yellati said by telephone. “It’s a good sign.”
To contact the reporters on this story: Charlie Devereux in Buenos Aires at firstname.lastname@example.org; Katia Porzecanski in New York at email@example.com; Camila Russo in Buenos Aires at firstname.lastname@example.org