Barclays Sees Bogus Growth Boosting Warrants: Argentina Credit
Warrants tied to Argentina’s economy are posting the biggest gains this year on speculation President Cristina Fernandez de Kirchner’s increased spending before mid-term elections will bolster growth and ensure a payout for holders of the securities.
The warrants, which pay investors if Argentina’s economy grows 3.22 percent this year, jumped 25 percent in the past week, the biggest gain since the five-day period ended Dec. 5, to 7 cents on the dollar. The notes surged after the government said June 27 the economy expanded 7 percent in April from a year earlier, exceeding the 5 percent median estimate. The jump was nine times more than Argentina’s dollar-denominated bonds in the same span and exceeded the 3.09 percent gain for emerging-market notes, according to JPMorgan Chase & Co.
The government is aiming to boost local consumption before congressional elections in October with a 70 percent increase in social spending after the economy grew just 2 percent last year. While Barclays Plc says the government is overstating its growth and the International Monetary Fund censured the country in February for providing misleading data on economic statistics, Citigroup Inc. estimates the payout could be as high as 6.5 cents.
“All that matters to investors is that growth exceeds the payment threshold,” Luis Celasco, who manages 1.7 billion pesos of Argentine bonds at RJ Delta, a unit of Raymond James Financial Inc., said in a telephone interview from Buenos Aires. “With the data and the fact that it’s an election year, there’s a good chance that Argentina will grow 3.2 percent or more. This really changes the outlook for the warrants.”
Norma Madeo, a spokeswoman at the economy ministry, didn’t reply to an e-mail seeking comment on data manipulation.
Fernandez, 60, is trying to revive economic growth by increasing public spending and handouts to poor families after a slowdown in Brazil, Argentina’s biggest trading partner, and restrictions on foreign exchange and imports choked off investment and curtailed growth last year.
Consumer spending expanded 6.1 percent in the first quarter and retail sales grew 6.5 percent, according to the national statistics institute, known as Indec. Car sales surged 32 percent in May from a year earlier, while exports rose 73 percent, the country’s automaker association reported June 5.
Demand from Brazil is aiding car exports, while Argentines are buying more vehicles as a hedge against inflation, according to a June 28 report by Economia & Regiones. Consumer prices rose an estimated 23.4 percent in May from a year earlier, according to private economists, while Indec reported inflation of 10.3 percent.
The government, which became the first IMF member to be censured for underreporting price increases, is overestimating growth in a bid to boost confidence in the administration, according to Buenos Aires-based research firm Espert & Asociados.
“The government has decided to risk paying the enormous cost of the warrant coupon of about $4 billion with the hope that now, by overstating this year’s growth, money will come in to reactivate the economy ahead of elections,” Jose Luis Espert, an economist who runs research firm Espert & Asociados, said in an e-mailed response to questions. The economy likely contracted 0.5 percent through April, he said.
The economy has to grow at least 2.9 percent for the rest of 2013 to meet the threshold for a payout, according Credit Suisse Group AG. Argentina will grow 2.7 percent this year, the median estimate of 24 economists surveyed by Bloomberg showed.
Investors should sell the warrants after the rally because growth will slow in the second half of the year, according to Sebastian Vargas, an analyst at Barclays in New York. If growth is close to the threshold, the government has an incentive to underreport it toward the end of the year, he said in e-mailed comments.
Fernandez made a $3.5 billion payment on the warrants in December after the economy expanded 8.9 percent in 2011. There won’t be a payment this year as growth in 2012 was only 2 percent compared with a trigger of 3.26 percent.
Argentina issued the warrants as part of its 2005 and 2010 restructurings after a record $95 billion default in 2001. The price of the notes declines after each coupon payment because it reflects estimated value of future cash flows.
The extra yield investors demand to hold Argentine government dollar bonds instead of U.S. Treasuries fell 11 basis points, or 0.11 percentage point, to 1,178 basis points at 12:51 p.m. in New York, according to JPMorgan.
The warrants are attractive for investors who can withstand price swings, according to Eric Kraus, a Moscow-based managing director at Nikitsky Capital, which manages about $200 million. He expects Argentina will grow over 4 percent this year with government spending accounting for 1 percent of GDP.
“If you don’t have to mark to market and you can put them in a back drawer, they’re a very great asset,” Kraus said in a telephone interview. “It’s all or nothing each year, so over a 10-year horizon, one would be a fool not to own them.”