Stable Peso Cutting Into Reserves Windfall for Treasury: Argentina Credit
Argentina’s currency is headed to its smallest decline against the dollar in three years, cutting central bank profits and pushing the government to use reserves at a faster pace to meet financing needs.
The peso dropped 4.5 percent against the dollar this year after a 9.1 percent slump in 2009, the least since a 2.9 percent retreat in 2007. The depreciation will help reduce earnings for Banco Central de la Republica Argentina to about 8 billion pesos ($2.01 billion) from 23 billion pesos in 2009, most of which was handed to the Treasury this year, said a central bank official who asked not to be identified, citing internal policy.
President Cristina Fernandez de Kirchner plans to draw $7.5 billion from the $52.1 billion of foreign reserves to cover debt payments next year, up from $6.6 billion this year, according to the 2011 budget. Argentina’s dependence on foreign reserves to pay obligations constrains its credit rating, Moody’s Investors Service said. Investors demand 493 basis points in extra yield to hold the government’s dollar bonds rather than U.S. Treasuries, almost three times more than in Brazil, according to JPMorgan Chase & Co. indexes.
“Part of the reason Argentina has such a low rating is these not very institutional methods they have to meet their financing needs,” Gabriel Torres, an analyst with Moody’s Investors Service, said in a telephone interview from New York. Moody’s rates Argentina B3, six levels below investment grade.
Fernandez’s restructuring of $12.2 billion worth of defaulted debt in June and record-low interest rates in the U.S. and Europe helped boost dollar inflows this year, curbing the peso’s decline and driving the average yield on Argentina’s dollar bonds to 9.23 percent from as high as 12.31 percent earlier this year. The government stopped making payments on $95 billion of debt in 2001, the biggest sovereign default ever.
South America’s second-biggest economy will likely expand 5 percent next year, after growing 8.6 percent in 2010, said Daniel Volberg, an economist with Morgan Stanley in New York who estimates the government needs about $8 billion in financing in 2011. He forecasts the government will likely post a budget surplus equal to 0.8 percent of gross domestic product next year, up from a 0.1 percent deficit this year.
“They’ve already said they’re going to use $7.5 billion in reserves next year, so that’s most of what they need,” Volberg said. The government will likely sell more Treasury notes to government agencies to help make payments, he said.
Argentina’s foreign reserves equaled about 16.9 percent of 2009 gross domestic product, less than the 18.3 percent of neighboring Brazil and ahead of the 15.9 percent maintained by Chile, according to data compiled by Bloomberg.
A decline in the currency increases the peso value of the central bank’s reserves, a gain it books as a profit that is transferrable to the Treasury during the following year.
An Argentine Economy Ministry official, who asked not to be identified in accordance with internal policy, said the government has alternatives and doesn’t foresee problems meeting its financing needs in 2011.
The extra yield investors demand to hold the government’s dollar bonds instead of U.S. Treasuries fell eight basis points, or 0.08 percentage point, to 507 at 7:05 a.m. New York time, according to JPMorgan.
The cost of insuring Argentine bonds against default for five years rose 22 basis points to 654 basis points yesterday, according to 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 comply with debt agreements.
The peso lost 0.1 percent to 3.9765 per dollar. Warrants linked to economic growth fell 0.17 cent to 13.70 cents, according to data compiled by Bloomberg.
Argentina’s peso is poised to fall for a seventh straight year, depreciating to 4.03 per dollar by year end and dropping to 4.29 by December 2011, according to the median forecast of 13 analysts surveyed by Bloomberg. In August, the analysts predicted a decline to 4.14 per dollar by yearend and 4.65 by the end of 2011. The currencies of neighbors Brazil and Chile have appreciated 2 and 7.1 percent this year.
“If exports were to decline and government revenue suffered, Argentina would be in a tough situation,” said Alejandro Urbina, an emerging-market debt manager at Silva Capital Management in Chicago. “But the economy is doing well, exports should continue to do well, and revenue should be OK.”
Inflation estimated to be in excess of 25 percent by Nomura Securities International Inc., Goldman Sachs Group Inc. and Credit Suisse Group AG is forcing the government to limit the currency’s decline to keep prices in check, according to Alberto Ramos, an economist at Goldman Sachs in New York. The government said inflation was 11 percent in November from a year earlier.
“The government doesn’t want to tighten monetary or fiscal policy to deal with inflation, so the only tool they have at their disposal is the exchange rate,” said Ramos. “Every time the exchange rate depreciates, it generates profits for the central bank. When it’s not depreciating, those profits can’t be passed on to the Treasury.”
Government spending rose 45 percent in October from a year earlier to 36.9 billion pesos.
Argentina is “keeping the peso on a short leash,” Ramos said. “They have a lot of latitude to spend and not erode their fiscal position, but the bottom line is, how disciplined are they on the spending side?”
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