3 Billion Reasons Why Believing Argentine GDP Is Optional

President Cristina Fernandez de Kirchner
President Cristina Fernandez de Kirchner has boosted spending and subsidies ahead of congressional elections next month and the 2014 budget showed the government projects growth of 5.1 percent this year. Photographer: Juan Mabromata/AFP via Getty Images

Buyers of warrants tied to Argentina’s economic growth have at least 3 billion reasons to believe the nation is expanding faster than China.

The securities have jumped 15.6 percent this month to the highest level this year, versus a 3.8 percent gain for emerging-market government debt. The government, which in February became the first member of the International Monetary Fund to be censured for reporting inaccurate data, said Sept. 20 that the economy grew 8.3 percent in the second quarter. That exceeds China’s 7.5 percent growth and would be the fastest in the world apart from Macao, according to data compiled by Bloomberg.

President Cristina Fernandez de Kirchner has boosted spending and subsidies ahead of congressional elections next month and the 2014 budget showed the government projects growth of 5.1 percent this year. While former central bank President Martin Redrado says the data is being inflated to garner more votes and the economy is actually expanding at less than half that rate, the official estimate surpasses the 3.22 percent needed trigger an estimated payment of $3 billion.

“For investors, what matters is the official reports and we see that the government is triggering a GDP warrant payment,” Hernan Yellati, head strategist at BancTrust & Co. said in a telephone interview in Buenos Aires. “This strategy of showing growth that is likely higher than the real one is an expensive one.”

Growth Outlook

Presidential spokesman Alfredo Scoccimarro and Norma Madeo, a spokeswoman for the Economy Ministry, didn’t return an e-mail and phone calls seeking comment on the accuracy of official data and the likelihood of a warrant payment.

The government would have to report a contraction of at least 3 percent in the third and fourth quarter from the previous quarters to miss the payment, according to Luciana Carcione, an economist at Orlando Ferreres & Asociados.

Opposition lawmakers said Sept. 19 the economy grew 5.4 percent in the second quarter from a year earlier and 3 percent in the first half, according to a report that compiled private estimates from 12 economic research firms.

Payments on the warrants are triggered when Argentina’s economy meets pre-established growth targets. Coupons are paid in December of the following year. The securities, which pay no interest and were issued as part of the nation’s debt restructurings following the 2001 default, rose 0.95 percent to 8.52 cents on the dollar at 4:02 p.m. in Buenos Aires, the highest this year.

‘Look Cheap’

Last month, Credit Suisse Group AG raised its 2013 growth forecast to 3.7 percent from a previous estimate of 3 percent and said holders of the securities will get a payment of 5.7 cents in 2014. Of 22 analysts surveyed by Bloomberg, 10 estimate growth this year will surpass the threshold for payment.

“GDP warrants valuations are attractive,” Credit Suisse’s strategist Daniel Chodos wrote in the Aug. 19 report, when he raised the growth forecast. “Optionality on Argentina’s future growth looks cheap.”

The country will have to pay about $3 billion to the warrant holders in December 2014, BancTrust’s Yellati said.

Since 2010, the country has tapped about $39 billion from central bank reserves to make debt payments. The 2014 budget bill includes a plan to use a record $9.86 billion in reserves for next year’s obligations. Reserves have tumbled 18.8 percent this year to $35.02 billion on Sept. 20.

Argentina’s budget bill sees the economy expanding 6.2 percent in 2014, above the 3.03 percent that triggers a payment in 2015. Government estimates exceed IMF forecasts of 2.8 percent this year and 3.5 percent in 2014.

IMF Doubts

“Alternative data sources have shown significantly lower real growth than the official data since 2008 and considerably higher inflation rates than the official data since 2007,” the IMF said in a footnote on its April’s World Economic Outlook. “In this context, the IMF is also using alternative estimates of GDP growth and CPI inflation for the surveillance of macroeconomic developments in Argentina.”

Redrado, who runs Buenos Aires-based MR Financial Services, said that official data is inflated as the government tries to show an economic rebound before Oct. 27 mid-term elections.

“There will be a revision of growth data in the last quarter because Argentina doesn’t have enough dollars to make the warrant payment,” Redrado said in a telephone interview. “It would be a wasteful payment.”

Argentina’s five-year credit-default swaps, contracts that protect the nation’s bondholders against non-payment, rose four basis points, or 0.04 percentage point, to 2,351 basis points at 3 p.m. in New York, according to data compiled by CMA Ltd. The peso fell 0.2 percent to 5.7712 per dollar.

‘Crazy’ Payment

The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell eight basis points to 1,029 basis points, according to JPMorgan’s EMBI Global Diversified index.

Since the warrants were first issued as part of the country’s debt restructuring in 2005, investors have received six payments totaling 18 cents as Argentina averaged growth of 7.4 percent. The securities can pay a maximum of 48 cents until they mature in 2035, or a total of $480,000 for a notional amount of $1 million. The government paid $3.5 billion in 2012 to warrant holders.

Argentina has decided to ease some import restrictions this year to prioritize growth before the mid-term elections, said Rodrigo Alvarez, an economist at Analytica research firm in Buenos Aires. The government won’t underreport growth enough in the fourth quarter to miss the payment, he said.

“It’s crazy for Argentina to lose 10 percent of its reserves for lying with its data,” he said. “But I don’t see the government showing a violent drop in activity to avoid the payment.”