Hard-to-Believe GDP in Argentina Triggers Warrants Surge
Securities linked to Argentina’s economy are surging by the most in almost three years as faster-than-projected growth fuels speculation the nation will expand enough this year to trigger a payout.
The warrants yesterday jumped 13 percent to a high this year of 8.1 cents after President Cristina Fernandez de Kirchner said on July 17 the economy grew 7.8 percent in May from a year earlier, exceeding economists’ estimates for 5.9 percent. Their 13.6 percent advance last week was the biggest increase since September 2010 and five times the average for emerging-market government bonds, according to JPMorgan Chase & Co.
While Argentina became the first country censured by the International Monetary Fund for unreliable economic data in February, investors in the warrants are gaining confidence the nation will expand more than the 3.22 percent needed to trigger a payment after the government’s official data topped analysts’ growth estimates for a second straight month. The economy was bolstered by a record harvest and improving construction and automobile industries, according to Tavelli & Cia.
“It’s going to be very difficult for anyone to argue that Argentina’s not going to post a strong official growth number this year, so that’s good news for the warrants,” Daniel Volberg, an economist at Morgan Stanley, said in a telephone interview from New York.
The average projection for growth this year is 2.5 percent, according to a Bloomberg survey of 24 economists.
The 2013 budget, approved by Congress last November, envisages economic growth of 4.4 percent. On July 12, Clarin newspaper, citing Economy Ministry officials it didn’t name, reported the government was maintaining that forecast.
Ministry spokeswoman Norma Madeo didn’t reply to an e-mail from Bloomberg seeking comments on economic growth this year and GDP warrant payments.
If full-year growth exceeds the threshold, the securities would be worth 9.61 cents, according to a July 17 report by Buenos Aires research company Quantum Finanzas.
Based on 8.9 percent economic expansion in 2011, Fernandez made a $3.5 billion payment on the warrants in December. No payment will be made this year as 2 percent growth in 2012 was less than the 3.26 percent trigger for that year.
“Either the economy would have to slow very sharply or there would have to be revision in numbers for there not to be a coupon payment on the warrants,” Juan Pablo Vera, head analyst at brokerage Tavelli & Cia., said in a telephone interview from Buenos Aires.
Last year, economic activity expanded 1 percent in April and contracted 0.7 percent in May.
Argentines probably won’t be aware of an increase in economic activity because the government is likely overestimating growth numbers, Morgan Stanley’s Volberg said.
“True growth dynamic in Argentina remains very much subdued, somewhere in the 3-percent range,” he said. “Whether we’re talking about people’s real incomes, the job market, investment, etc., we’re not going to see the same kind of impact as a real 8 percent number.”
Even if official economic growth is more than 3.22 percent, the payouts will hinge on the outcome of a U.S. legal dispute with creditors from Argentina’s record $95 billion default in 2001, according to Citigroup Inc.
Owners of securities left over from the default are demanding $1.4 billion. Argentina said it will only pay the so-called holdouts, led by billionaire investorPaul Singer, the same as it offered in a 2010 restructuring, which was worth about 30 cents on the dollar. U.S. District Judge Thomas Griesa has ordered trustees to withhold payments on restructured debt if Argentina doesn’t also pay defaulted debt.
“There are significant risks,” wrote Citigroup analysts Guillermo Mondino and Fernando Diaz in a July 22 report. “If the court ruling implements a final formula higher than what Argentina is willing to pay, the trustee is bound by the injunction, and a new stay of execution is not warranted, bonds and warrant payments could be at risk.”
The extra yield investors demand to hold Argentine government debt instead of U.S. Treasuries widened two basis points, or 0.02 percentage point, to 1,042 basis points at 9:08 a.m. in Buenos Aires, according to JPMorgan Chase & Co.’s EMBI Global Diversified index.
Argentina’s five-year credit default swaps, contracts that protect holders of the nation’s debt against non-payment, rose 16 basis points to 2,204 basis points, the highest in the world, at 8 a.m. in New York.
Sluggish 2012 activity, a recovery in grain and soybean harvests that were affected by drought last season, and a pickup in the car and construction industries are driving this year’s faster growth, Tavelli’s Vera said.
Argentina, the world’s third-largest exporter of corn and soybeans, had a record harvest of 105.4 million tons in the past season, according to a July 17 statement on the presidential website.
Demand from Brazil is helping car exports, which surged 73.1 percent in May, 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, more than double the 10.3 percent reported by the government’s statistics agency.
“My bet is the economy is going to slow, but if you look at what has been the average growth so far for the year, we’re already talking about 4.8 percent just in the first five months,” Volberg said. “From the point of view of the warrants, you need to somehow justify a contracting economy which is always a possibility but that doesn’t seem like the base case.”