Argentina Losing Luster as Debt Glut Adds to Election Risks

  • Sovereign bonds among worst performers since century sale
  • Macri’s party to face Cristina Fernandez in midterm elections

The shine is starting to come off President Mauricio Macri’s Argentina.

The country’s overseas bonds are among the worst performers in emerging markets over the past three weeks, the peso keeps hitting record lows and that foreign-exchange volatility led one of its biggest energy companies to scrap a debt sale. Perhaps most embarrassingly, the nation lost out on its bid to regain emerging-market status last month, leaving it stuck at the “frontier” level with the likes of Mauritius, Sri Lanka and Kazakhstan.

It wasn’t supposed to be this way. A darling of emerging-market investors since he came to power in December 2015 promising to ignite the economy, subdue inflation and roll back regulations that impeded businesses, Macri is now struggling to make good on those pledges after a run-up in asset prices. To make matters worse, a new threat looms: Cristina Fernandez de Kirchner is running for a senate seat, raising the possibility the former president deeply unpopular with investors is poised to make a political comeback.

“We’re at that point where the government’s got to post some concrete results on their objectives,” said Michael Roche, a New York-based fixed-income strategist at Seaport Global Holdings. “It would be disheartening certainly if still a large part of the voting population wanted to go back to heavy-handed management of the economy and the like.”

Debt levels are at the forefront of investors’ minds these days after the government surprised observers by selling a 100-year bond in mid-June, joining a small club of developing nations that have convinced bond buyers to lend for a century. While Macri was able to lock in historically low interest rates, strategists are worried about a glut of Argentine paper after a borrowing spree since the president came to office.

Read more about investors’ appetite for Argentina’s high yields

The $2.75 billion century sale raised overseas dollar-debt issuance in the first half of 2017 to $10.2 billion, above the government’s initial estimates of $7 billion for the whole year in its financing program. The plan still allows for the $2.6 billion in euro or Swiss franc issuance and $3 billion in local markets during the rest of the year. And that comes after $19 billion of sovereign bond sales in 2016, when Macri led Argentina back to global capital markets after a decade-long legal dispute with creditors.

The extra yield investors demand to hold Argentine bonds instead of Treasuries rose 25 basis points since the bond sale to 436 basis points, the highest in three months, at 10:55 a.m. in Buenos Aires.

“It was a lot of supply, which folks weren’t expecting,” said Edwin Gutierrez, the London-based head of emerging-market sovereign debt at Aberdeen Asset Management Plc, who said the fund didn’t participate in the century-bond sale after yields tightened from an initial target of 8.25 percent. “Whenever they say they’re done for the year, don’t believe them.”

Bond investors are also watching legislative elections to be held in October, where Macri’s Cambiemos coalition will contend against Fernandez’s effort to revive her political career. Concern about the outlook has sent the peso tumbling, and Pampa Energia SA was forced to scrap an overseas bond sale last week amid the volatility. Macri’s party was in a dead heat with Fernandez’s in a poll published by Management & Fit on July 2.

A good showing by her allies could set the stage for wider rifts in congress, where Macri already faces resistance to his plans to cut taxes and modernize capital markets. They’re part of his effort to undo the legacy of Fernandez, whose administration produced economic statistics that were questioned by outside observers as it imposed currency controls and labeled hedge-fund creditors as “vultures.”

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“That’s a fear in the market that if Cristina does better than expected in the midterm elections, the Cambiemos coalition might have to back off in some of the reforms that they had done a good job of implementing,” said Sean Newman, who helps manage $1.4 billion in emerging-market debt at Invesco Advisers. “The elections represent the ability for Macri to succeed in his reforms and to continue, or to reach a halt.”

Since taking office, Macri has succeeded in reopening parts of Argentina’s economy, but inflation still remains among the fastest in the region and economic growth trails government forecasts. On June 20, MSCI Inc. surprised analysts from banking including JPMorgan Chase & Co. and Credit Suisse Group AG when the firm announced it wouldn’t raise Argentina to emerging-market status because it wasn’t convinced that economic changes under Macri were “irreversible.”

Even with MSCI’s decision, Argentina is one of the best destinations for investing in developing nations, according to a note by XP Securities. Analysts there highlighted that the Merval stock index has gained 24 percent in dollar terms this year even after a selloff following the MSCI news. They recommend Argentina given the expectation that the country is entering a longer-term “capital deepening process” after years of stagnant investment.

And to be sure, there’s still appetite for Argentine assets. The province of Cordoba sold $450 million of bonds last week, and Rio Negro went ahead with a sale of floating-rate bonds. The province of Buenos Aires is planning its first euro bond sale since 2006.

But some analysts worry the country’s momentum is slowing. The underperformance in Argentine bonds accelerated after Fernandez announced her senate bid, and there’s likely to be volatility ahead of the midterm elections, said Stuart Culverhouse, the head of sovereign and credit research at Exotix Capital, a London-based investment bank that specializes in frontier markets.

“The negative interpretation is simply that an Argentina 100-year bond marks the top of the cycle,” he said.

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