Latin Finance - November/December 2011 - 64

argentina sovereign

Reversal of Fortunes
by Mariana Santibáñez entiment toward Argentina is souring as investors question the sustainability of President Cristina Fernandez de Kirchner’s growth policies. The sovereign’s assets are already lagging high-beta peers, and analysts see spreads widening further in coming months if the government fails to take a different tack soon. Ever since markets realized Kirchner would win a landslide victory in October’s presidential elections, investors have sent Argentina spreads ever wider amid fears that the government will dig in its heel over macroeconomic policies that they think are not working. As of early November, the sovereign’s five-year CDS spreads were on an equal footing with Venezuela after being some 400 basis points inside its troubled highbeta peer just months earlier. This marks an abrupt change in sentiment towards a country that was finally seen making amends with the international investor community amid expectations it would return to the international markets. From the government’s perspective, investors’ reactions to the sovereign simply reflect broader market dynamics and the usual uncertainties that occur during an election year. “There are two reasons for the current stresses in the Argentine market,” Finance Secretary Hernan Lorenzino told LatinFinance in early October. “This is an electoral year and there are some pressures that exist now that have not existed in normal years. It is not clear what 2012 will bring for the global environment and the market is reflecting that.” Yet above and beyond the contagion effects caused by Europe’s debt troubles, capital flight, a deteriorating trade account and a weakening peso are worrying investors. “If they keep the currency stable,

S

Once seen as an improving credit story, Argentina is being punished in the secondary markets as investors fret about the sustainability of growth policies.
they will deplete reserves,” says Jeremy Brewin, fixed-income strategist at Aviva Investors. “[But] there are fears a depreciating currency will accelerate the flight of money because the currency [has been] overvalued and Argentina has become less competitive.” Even when risk appetite spiked briefly in October, Argentine assets failed to recover in a sign that the country’s problems go beyond the possible spillover effects from the broader market selloff. According to Siobhan Morden, head of LatAm strategy at RBS, the spread between the spot FX rate and the so-called blue-chip rate recently hit its widest level since the Lehman crisis. “That shows how stressful market sentiment has become,” she adds. “Add to that the reversal in external risk appetite and this is the beginning of a vicious cycle of negative risk sentiment.” The government’s mandate in October forcing oil and mining companies to repatriate export earnings was seen as a way to reduce pressure on the FX rate, but markets largely took it as a sign that more interventionist measures were on the horizon, leaving them unconvinced that such efforts will make much difference in the long-term. However, given the fine balance between achieving its growth goals and containing inflation, the government is unlikely to take radical measures, say some analysts. “The Kirchner government will probably try to preserve the fiscal and trade surpluses, and the large stock of central bank reserves, but it will not go to extremes to achieve those objectives,” says Carola Sandy, an economist at Credit Suisse. It is thought that the government will try to maintain the same growth policies that helped the president win her overwhelming victory in October. But efforts to maintain a competitive edge in export markets through currency depreciation at a time of high inflation is seen as unsustainable. With no access to external financing – at least at reasonable rates – the government can ill afford to let the account and trade balances deteriorate. A weaker currency in Brazil has only compounded such worries since LatAm’s largest economy now absorbs a good chunk of Argentina’s exports. Argentina’s ability to increase its levels of FX reserves has largely come on the back of a strong export performance and more recently, corporates’ access to external markets. But an erosion in the trade balance and limited access to external financing have upset that dynamic. According Nomura analyst Boris Segura, the government plans to use over $8 billion in reserves to service external debt in 2012. Lorenzo, however, emphasizes that financing needs represent less than 2% of GDP next year and the government will be able to cover this internally. Against that backdrop, the government’s commitment to an orderly peso depreciation is expected to result in a decline in the FX reserves this year and next. This is a worrying prospect for accounts investing in a country where the government relies on those funds to pay down debt. LF

64 LatinFinance

November/December 2011



Latin Finance - November/December 2011

Table of Contents for the Digital Edition of Latin Finance - November/December 2011

Latin Finance - November/December 2011
Contents
Contagion Risk
Mexican Credit
China Investment
Loan Markets
Mexico Banks
Sub-Sovereign Debt
Banks of the Year 2011
Argentina Investor Report
Reversal of Fortunes
Latin Finance - November/December 2011 - Latin Finance - November/December 2011
Latin Finance - November/December 2011 - Cover2
Latin Finance - November/December 2011 - Contents
Latin Finance - November/December 2011 - 2
Latin Finance - November/December 2011 - 3
Latin Finance - November/December 2011 - 4
Latin Finance - November/December 2011 - 5
Latin Finance - November/December 2011 - 6
Latin Finance - November/December 2011 - 7
Latin Finance - November/December 2011 - 8
Latin Finance - November/December 2011 - 9
Latin Finance - November/December 2011 - 10
Latin Finance - November/December 2011 - 11
Latin Finance - November/December 2011 - Contagion Risk
Latin Finance - November/December 2011 - 13
Latin Finance - November/December 2011 - 14
Latin Finance - November/December 2011 - 15
Latin Finance - November/December 2011 - 16
Latin Finance - November/December 2011 - 17
Latin Finance - November/December 2011 - 18
Latin Finance - November/December 2011 - 19
Latin Finance - November/December 2011 - 20
Latin Finance - November/December 2011 - 21
Latin Finance - November/December 2011 - Mexican Credit
Latin Finance - November/December 2011 - 23
Latin Finance - November/December 2011 - 24
Latin Finance - November/December 2011 - 25
Latin Finance - November/December 2011 - China Investment
Latin Finance - November/December 2011 - 27
Latin Finance - November/December 2011 - 28
Latin Finance - November/December 2011 - 29
Latin Finance - November/December 2011 - Loan Markets
Latin Finance - November/December 2011 - 31
Latin Finance - November/December 2011 - 32
Latin Finance - November/December 2011 - 33
Latin Finance - November/December 2011 - Mexico Banks
Latin Finance - November/December 2011 - 35
Latin Finance - November/December 2011 - Sub-Sovereign Debt
Latin Finance - November/December 2011 - 37
Latin Finance - November/December 2011 - Banks of the Year 2011
Latin Finance - November/December 2011 - 39
Latin Finance - November/December 2011 - 40
Latin Finance - November/December 2011 - 41
Latin Finance - November/December 2011 - 42
Latin Finance - November/December 2011 - 43
Latin Finance - November/December 2011 - 44
Latin Finance - November/December 2011 - 45
Latin Finance - November/December 2011 - 46
Latin Finance - November/December 2011 - 47
Latin Finance - November/December 2011 - 48
Latin Finance - November/December 2011 - 49
Latin Finance - November/December 2011 - 50
Latin Finance - November/December 2011 - 51
Latin Finance - November/December 2011 - 52
Latin Finance - November/December 2011 - 53
Latin Finance - November/December 2011 - 54
Latin Finance - November/December 2011 - 55
Latin Finance - November/December 2011 - 56
Latin Finance - November/December 2011 - 57
Latin Finance - November/December 2011 - 58
Latin Finance - November/December 2011 - 59
Latin Finance - November/December 2011 - 60
Latin Finance - November/December 2011 - Argentina Investor Report
Latin Finance - November/December 2011 - 62
Latin Finance - November/December 2011 - 63
Latin Finance - November/December 2011 - Reversal of Fortunes
Latin Finance - November/December 2011 - Cover3
Latin Finance - November/December 2011 - Cover4
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