Argentina’s return to the international debt markets highlighted the pent-up demand for that increasingly rare investment opportunity: a strengthening EM credit.
Demand for the four-tranche deal reached a record $69 billion, enabling the global coordinators Deutsche Bank, HSBC, JPMorgan and Santander to squeeze on pricing with yields of between 6.25% and 8% on the three-, five-, 10- and 30-year bonds. The bonds soared in the after-market.
However, quibbles aside, bankers say the deal was well executed. Pablo Santiago, head of research at independent Argentine investment bank Banco Mariva, says the country timed its return to “perfection”, given the backdrop of a general improvement in EM.
“The record demand shows that international investors are willing to finance the country’s big twin deficits, at least in the short term,” says Santiago. “Macri’s plan to make the economic adjustment gradually has a high chance of success now, in our view.”
Fiscal gap
Alfonso Prat-Gay, has ruled out any further international issuance this year and, having capped the transfer of funds from the central bank to the treasury at Ps160 billion ($10 billion), it leaves a $15.6 billion fiscal gap. Santiago thinks Prat-Gay may be tempted to change tack and re-tap international markets in the second half of the year. “This strong demand for Argentine bonds increases the incentives of the government to issue more debt in the international market to finance the fiscal deficit,” he says.
“Given that the government set a target for a fiscal deficit of 4.8% of GDP and set a cap for the transfers to the treasury from the central bank, then the remaining funds need to be raised in either the local or international markets. In this sense, the higher-than-expected demand from abroad could be translated into a lower-than-expected bond supply in the local market. Keep in mind that higher supply of sovereign bonds in the local market puts pressure on local interest rates – increasing the cost of financing for the private sector.”
