The Argentine financial markets continue to adjust positions after last week’s monetary policy rate cut and record auction of Treasury securities, with their gaze directed to the legislative level where the Government seeks an opinion in the Senate to advance the deregulation of the economy .
In that context, the risk country of Argentina, measured by the JP Morgan bank, returned to exceed 1,400 points after almost two months, while dollar bonds fell for the third day in a row. This Thursday they adjust 0.5% on average.
Meanwhile, the risk country Argentine advances 35 units this Thursday, 1,429 basis points, at the highest since April 2. And from 1,143 points on April 22 (a floor since September 10, 2020), the country risk increased by 286 basis points in one month.
The public securities of the debt exchange touched a month ago their highest prices since they went public in September 2020. Since then, the Global companies with foreign law decrease by 8.3% on average, while the Bonares -with Argentine law- fall 5.1% on average.
1) Taking profits. Bonds in dollars began 2024 around USD 25 and a month ago were traded around USD 60. Many investors considered that after obtaining a 100 percent profit in dollars in four months it could be opportune to get out of this position and look for financial assets with greater upside potential in the short term.
“The sovereigns hard-dollar They are coming off strong returns so far this year, driven by two main factors. Firstly, the local factor where the accumulation of reserves has been successful, meeting the IMF goal. On the other hand, the global ‘driver’ is the rally in emerging debt of a similar rating that accompanied Argentina,” explained the consulting firm. Delphos Investment.
2) Base Law and fiscal package. The legislative treatment of these official initiatives that are fundamental in the executive plan of Javier Milei. Probably its approval was already assumed in prices; The fact of postponing this bullish foundation also influences the current price of the debt.
“Prior to the start of the debate in committee in the Senate, the market had a high probability in prices that the ‘Bases Law’ and the fiscal package would be approved, even with changes proposed by the opposition. “We believe that this delay could very partially explain the advance in ‘cash with settlement’, as well as the falls in bonds and stocks,” he indicated. Juan Manuel Franco, Chief Economist of the SBS Group. “It is necessary, in the face of real economic normalization, to give greater firmness and solidity to the fiscal anchor. We say this because, despite the fiscal surplus shown in the first four months, the fiscal anchor still needs to be provided with greater medium-term sustainability,” he added.
“The approval of the ‘Bases Law’ and the fiscal package becomes an important step for reforms and fiscal sustainability, in addition to providing signs of greater political consensus and governability to continue advancing in the organization of the economy,” said the economist Gustavo Ber.
3) Lower rates. The drastic cut in monetary policy rates also has an indirect effect on debt. On April 10, the BCRA Passive Repos rate was at 80% nominal annual rate. With the conviction of a decline in inflation, the monetary entity reduced it by half, 40 percent. The objective of this path – four rate adjustments in just over a month – was always clear: for the banks to dismantle their positions in Repos – in the liabilities of the BCRA – to migrate to Treasury debt.
From April 10 to May 21, the Stock of Passive Passes and Nobac was reduced by almost 10 trillion (about USD 11,000 million at the official exchange rate), from $34.2 trillion to 25.5 trillion pesos. These pesos were basically absorbed by the Treasury with the placement of bonds in pesos, which would mean an increase in sovereign debt in the same proportion. A debt market with such a supply of securities could take away liquidity from the demand for dollar bonds.
“Assuming that the additional financing obtained by the Treasury comes entirely from the disarmament of passive passes, that would leave the remunerated liabilities of the Central Bank at minimum levels not seen since November 2019,” he estimated. Salvador VitelliHead of Research at Romano Group.
4) Lack of reserves. Since Milei assumed the Presidency, the Central Bank faced an intense stage of purchasing foreign currency in the wholesale market, which already totals almost USD 17,000 million, but the reserves did not grow to the same magnitude -less than USD 8,000 million-, due to payments of debt that were made with those currencies. In fact, gross reserves of around USD 29 billion today are about USD 1 billion below the level of a month ago – there were important payments to the IMF – in the period in which more dollars should be entering the coffers of the entity for agricultural exports.
Stock market agents are also very aware of the increase in the stock of foreign currency in official hands, given that these are the guarantee for payment of the debt in foreign currency.
Last Tuesday, lawyers representing the Argentine State in the courts of the United Kingdom, in a case over the payment of the PBI Coupon, assured that any forced payment in the midst of the recession could jeopardize “the ability of the Republic to pay both its debt tied to GDP like conventional debt.”
This week, the Minister of Economy Luis Caputo spoke at the Congress of the IAEF (Argentine Institute of Finance Executives), where he pointed out that “normalizing stock” is essential to avoid situations of unsustainable debt, which requires strict control of reserves and, therefore, of the continuity of change control in the short term.
“For investors who prefer to take greater interest rate risk, we believe that Latin American sovereign bonds continue to offer a good risk-return ratio, while for those who only prioritize credit quality, American fixed income is the exposure we favor. ”, reported the Balanz brokerage.
