El Cronista – A few days after the panic of Argentina’s financial markets, some investors started to make plans that would quickly confront the difficult situations of an environment characterized by the loss of price liquidity.
In this context, even small operations can occasionally cause abrupt changes in market prices, making it difficult to implement substantial change. The Argentine markets and many sectors in emerging don’t have much liquidity. The pessimistic conditions for negotiation remind fund managers why they can’t confide in the banks with the regulatory restrictions that guarantee well-functioning markets.
According to Gene Frieda, a strategist for Pimco, this sudden deterioration of liquidity –a term used to reference merchantability- it became a phenomenon in emerging markets this summer. “We have a series of idiosyncratic crisis, but the surprise is the magnitude of the measures”.
Even so, today incipient signs established after the announcement from Argentina’s government that eliminating the fiscal deficit is a primary goal in the next year. That is to say that the focus is on the gap between expenditures and state revenue before considering the debt owed. The promise of the IMF is to review the rescue program of $50 million USD to briefly help stabilize the markets.
The Argentine currency is stabilized around 37 pesos per USD, the Merval bounced since its minimum and the yield of state bonds for 10 years in dollars feel from a maximum of almost 11% to roughly 10%. This includes the “Follow Bonus”, that at 100 years emitted maximum enthusiasm from Argentine investors in 2017 is a mole with a floor higher than 70 cents, which is the equivalent yield of 10%.
The consequence is that some investors are looking for opportunities to sell. “I see this as not just a buying opportunity, but the best opportunity to buy in 16 years”, said Jan Dehn, head of global research at the Ashmore asset manager, in view of Argentina’s devaluation in 2002.
He also warned that the peso could fall again since it is almost guaranteed that another recession will hit Argentina this year. However, he argues that there was an excessive sale in the riskiest emerging markets due to the incorrect belief that the US dollar will continue to strengthen indefinitely.
Diego Ferro, codirect of investment at Greylock Capital, sees a similar value in the country. “For the first time in a long time, the peso is cheap”, he showed. “It doesn’t mean that it can’t be cheaper, but with rates as high as these, dumping the peso, in the long run, will be a big business”.
Besides, the devaluation allows the country to eliminate a significant part of the Current Account deficit and improve its solvency, added Ferrot. “The market is generating good part of the adjustment that the economy needs, and if the government can fix the fiscal hole, the country seems much more sustainable now than a year ago”.
However, other investors remain suspicious of Argentina and emerging markets in general.
Concerns about Argentina were growing for most of 2018, increasing the value of credit default swaps (CDS) that refer to the country’s bonuses from a theoretical net value of 3 million USD in March this year to more than 5 million at the beginning of September.
However, the crisis caused the cost of the Argentine CDS to rise from 250 base points at the beginning of August to a peak of 877 in recent weeks, above Lebanon, Turkey, Pakistan, and Iraq, and only below Venezuela, which has already eluded its payment commitments.
The USA’s rising interest rates and the dollar revival shook many emerging economies that carry large debts in dollars and disproportionately depend on short-term capital flows that can quickly evaporate when the attitude of the market changes. As the dollar strengthens against local currencies, the repayment of foreign currency-denominated debts becomes a more difficult task.
That is the principal cause of concern with respect to Argentina’s solvency, one of the largest debts in dollars in the developed world. While some analysts believe the resurgence should be discarded, there are many investors who aren’t ready to go back to underground.
Graham Stock, head of sovereign debt research of emerging markets for BlueBay Asset Management, intended – before launching again in Argentina – that the IMF be clearer as to the credibility of the fiscal adjustment of Argentina and to the level of tolerance that the organization will have of the goals set out in the original rescue package.
Nicolás Dujovne, Minister of Finance in Argentina, insinuated last week that this month they could get to negotiate a review of the agreement with the IMF. This is how much of the remaining rescue package is anticipated and will resolve some of the skepticism expressed by managers as Stock.
Assuming that the government can achieve the difficult task of cutting the primary fiscal deficit one year before the originally anticipated date, in 2020, Merrill Lynch of the Bank of America estimates that without an advance of IMF funds, the financing needs of Argentina the next year will be 23 million USD. If the country refinanced more than 60% of its short-term debt during that period, the financing gap is extended to 10 million USD.
Stock, of BlueBay, also worries about the presidential elections next year, given the harsh austerity measures that Macri announced. “Precious fiscal adjustment attempts ran into a tough opposition in the streets,” said Stock. “This program is more aggressive and the burden will fall on the workers and exporters of the public sector”.