Foreign investors show faith in Argentina with bond-buying spree

Posted on November 10, 2016

Financial markets buzzed with excitement when a new business-friendly administration proudly declared this year that Argentina was “back” after 12 years of populist rule. In a world where returns on assets are at record lows, a fiesta of juicily yielding debt ensued.

In an impressive vote of confidence, foreign investors have even lately been snapping up long-term local currency bonds, taking advantage of soaring interest rates aimed at extinguishing inflation that is running at about 25 per cent. 

But some local businesses worry that interest rates at 26.75 per cent are also holding back recovery from an economic contraction of as much as 2 per cent this year, as President Mauricio Macri attempts to revive the traumatised economy he inherited from the previous administration. 

“High interest rates have killed the real economy. Businesses aren’t selling anything, nor can they borrow at such high rates,” says Raul Zylbersztein, who owns a small factory making leather goods. He complains that the removal of trade barriers has led to an “invasion” of imported goods. 

“They have also brutally removed energy subsidies, withdrawing a lot of money from the market,” adds Mr Zylbersztein, who is also president of Feciba, an association for small and medium-sized enterprises in Buenos Aires. SMEs are smarting from higher energy bills that have multiplied by about six times this year, prompting many to cut workers. 

Much is riding on the recovery of Argentina’s real economy. The exuberance of foreign investors is helping to finance the transition, but a pick-up in activity well before midterm legislative elections next October is essential for the survival of the centre-right Mr Macri’s project to continue opening up and restoring competitiveness to the economy. 

Although many analysts argue that the economy bottomed out in the third quarter, the latest figures cast doubt on the speed of the recovery, with industrial production in September dropping by 7.3 per cent year on year because of weak domestic demand and lower exports to Brazil. 

Despite all the dollars flooding into the economy — central bank reserves recently surged above $40bn, when less than a year ago many feared Argentina was on the brink of a balance of payments crisis — this is unlikely to translate into a boom in local credit that could fuel economic growth until inflation is well under control. 

“However much credit is available, companies and individuals are not willing to borrow at such high interest rates, and they are not going to fall until inflation does,” says Facundo Gómez Minujín, who runs JPMorgan’s office in Buenos Aires. 

Although analysts predict that outstanding loans will triple over the next four years, Mr Gómez says that inflation will need to be in single digits before credit can really take off, which will take at least another year. While large companies can borrow abroad, that option is not open to SMEs, which account for about 80 per cent of employment. 

Nevertheless, the government is banking on private investment to drive economic growth. While investors have stampeded into financial instruments — which has strengthened the peso by more than 10 per cent in real terms since a sharp devaluation in December after currency controls were removed — investment in the real economy has so far been slow. 

“An investment boom will be difficult as long as there is an overvalued currency and unprecedentedly high taxes thanks to the previous government remain in place, which they have done nothing to fix so far,” says Ricardo Esteves, an influential local businessman. 

Sovereign issuers have raised more than $40bn of debt so far this year, but barely $2bn has come into Argentina as foreign direct investment. That contrasts with some $53bn of investment announcements that the government says will be carried out by 2019, mainly in energy, mining and infrastructure. 

Perhaps the strongest sign of interest from foreign direct investors was in a renewable energy auction that was 10 times subscribed, with 20-year contracts worth $1.8bn awarded last month. 

Gabriel Goldschmidt, the International Finance Corporation’s director for infrastructure in Latin America, said the success of the auction — before Congress’s approval this week of an important public-private partnership law — was “extraordinary”. 

For now, foreigners appear to be more upbeat about Argentina’s economic prospects than locals. “That must change. It is important for Argentines to bet on their country. That isn’t entirely happening yet, only very slowly,” says Mr Gómez. He believes that some $60bn of the $400bn that Argentines hold offshore could be repatriated through a tax amnesty under way, providing “a very important signal”. 

“Argentina is going to take off,” says Carlos Rosso, president of Miami-based Related Condominium Development, which has sold 80 per cent of a $100m luxury residential project in the waterfront district of Puerto Madero in Buenos Aires that it bought in February. “But it’s going to take time.”

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