JPMorgan Predicts Dollar Drain Worst Since ’02: Argentina Credit

Argentine President Cristina Fernandez de Kirchner is starting to run low on dollars to pay the nation’s bondholders.

Central bank reserves fell six percent in the first quarter, the most for the period in six years, and sank below $40 billion this month for the first time since 2007. As investors await a U.S. court ruling on whether the nation must pay holdout creditors including billionaire Paul Singer from its 2001 default, the extra yield they demand to own Argentine debt instead of Treasuries rose to 12.01 percentage points this year. That’s almost twice the premium similarly rated Belarus and Ukraine pay, leaving Argentina as the only distressed borrower among 55 emerging markets tracked by JPMorgan Chase & Co.

The drain on Argentina’s reserves, which Fernandez has used for public spending and payments to bondholders since 2010, is set to accelerate as revenue growth from agricultural exports slows, JPMorgan estimates. Reserves will tumble at the fastest rate in a decade by year-end, leaving Argentina with just $37.5 billion. That would only cover 75 percent of the country’s foreign-currency debt obligations due from 2014, Economy Ministry data show.

“What the market looks at is the country’s ability to pay in the future,” Mariano Tavelli, president of brokerage Tavelli & Cia., said in a phone interview from Buenos Aires. “For now, we don’t see a genuine stream of dollars coming in that will replenish the reserves we’re losing.”

Debt Payments

The government has made about $755 million in debt payments this year by drawing down central bank reserves. The treasury gets money from the central bank in exchange for a non-transferable 10-year note that pays maximum interest of the one-year London interbank offered rate minus one percentage point. Libor was at 0.715 percent on April 19.

After 2013, the government’s foreign currency debt obligations will total $50.3 billion, excluding the $27.9 billion in non-transferable notes sold to the central bank, according to the latest Economy Ministry data.

While Fernandez has banned most foreign-currency purchases, the reserve decline is prompting more Argentines to try to buy dollars as central bank president Mercedes Marco del Pont pumps pesos into the economy to keep borrowing costs low, said Tavelli. With a 37 percent increase in the money supply over the past year, the 304 billion peso ($59 billion) monetary base is within 2 percent of its record high on Dec. 28.

Weakening Peso

Expectations of a steeper decline in the peso, which will weaken a further 12 percent this year to 5.84 per dollar, according to the median estimate of 16 analysts surveyed by Bloomberg, may tempt exporters to hoard their grain until then, according to Hernan Yellati, a strategist at BancTrust & Co. in Miami. Argentines pay as much as 8.9431 pesos per dollar in a parallel exchange market compared to the official rate of 5.1678.

The government’s revenue from export duties fell in March for a fourth month, declining 30 percent from a year earlier, the only tax segment to post a drop. Vladimir Werning, an economist at JPMorgan in New York, estimates exports will total $87.1 billion this year, an 8 percent increase from last year on a better harvest.

In addition to fewer dollars being sold to the central bank, Argentines withdrew $665 million from their dollar-denominated savings accounts this year, contributing to the loss in reserves, according to Werning. Banks deposit foreign currency that is not loaned to exporters in Argentina’s central bank, so when savers make withdrawals, the central bank returns the cash to the bank and reserves decline.

‘Investor Attention’

“The decline in gross international reserves continues to be a focus of investor attention,” Werning wrote in a report. “The time that policymakers have bought with controls has not been invested to resolve fundamental macro concerns, such as high inflation and ongoing real exchange rate appreciation.”

Prices rose 24.4 percent in March from a year earlier, opposition lawmakers, citing estimates from economists, said April 11, as the peso weakened 14.7 percent in the past year.

Inflation and the peso’s decline led Vale SA, the world’s biggest iron-ore producer, to shelve a $5.9 billion potash project in Argentina last month. The cost to develop the project almost doubled to $11 billion, while Argentina refused to give the Rio de Janeiro-based company any tax breaks, Chief Executive Officer Murilo Ferreira said on March 18.

‘No Problem’

The nation’s savings are also being squeezed by state-owned oil company YPF SA, which will have to spend an additional $400 million to import fuel to supply service stations after a flood and fire at its La Plata refinery reduced output.

Still, the government will have enough reserves to pay debt at least through 2016, according to Luis Celasco, who manages 1.7 billion pesos of Argentina bonds at RJ Delta, a unit of Raymond James Financial Inc. in Buenos Aires.

“I don’t think the drop in reserves below $40 billion is a trigger for people to sell bonds,” Celasco said in a telephone interview. “With the current picture, now that capital flight has decelerated because of currency controls, there’s no problem.”

The cost to protect $10 million of Argentine debt against non-payment during five years with credit-default swaps plunged 1,037 basis points, or 10.37 percentage points, this month to 2,072 basis points, data compiled by CMA Ltd. show.

The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

Commodity Cycle

In commodity-dependent Peru, the central bank’s foreign currency holdings have risen eight percent this year. In Brazil, the world’s biggest shipper of coffee and orange juice and the second-biggest exporter of soybeans, reserves have dropped just 0.4 percent to $377 billion.

“They’re underperforming relative to what their neighbors are doing, so you kind of expect as a commodity producer in this commodity cycle, they should be doing a little bit better,” Gabriel Torres, an analyst at Moody’s Investors Service, said in a telephone interview from New York. “It’s just purely because of a lack of confidence in the government.”

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