Little by little, as if it were a big puzzle, the pieces are fitting into Argentina’s finances and economy. Activity seems to have reacted positively (with GDP growth and moderation of inflation) after the drastic cuts in public spending, the new legislation to provide certainty for business investment and the total or partial deregulation of several sectors to pave the way to market forces. Now another of the key moments of Javier Milei’s Government has arrived. The first major debt payment since the 2020 restructuring. Everything indicates that the Government of Argentina has complied with its creditors and has paid more than 4,000 million dollars to face one of the first maturities of a year that is anticipated to be complicated. The market responds after payment and country risk falls again 12 basis points (the accumulated drop is more than 1,000 basis points since the summer) to 560 basis points. Even a major fund manager has assured the Financial Times Seeing what we have seen to date, I would not bet against Argentina, although the bonds have consumed a good part of the upward path they had, there are still good things to come.
Argentina has made a payment of $4.3 billion to sovereign bondholders, marking its largest repayment since debt restructuring in 2020. As reported by the Financial Times (FT), this step is key for libertarian President Javier Milei to regain confidence in a country historically known for its debt defaults. Of the total, 3.7 billion dollars went to private bondholderswhile the rest went to public organizations with Argentine debt. The payment was made using the fiscal surplus generated last year thanks to a severe austerity plan. All in all, GDP expanded by 3.9% in the third quarter of the year (quarter-on-quarter) and inflation has moderated to 2.4% monthly (compared to 25% in December 2023).
Returning to the payment of the debt, the FT highlights that this payment represents an important milestone for the Milei government. When he took office in 2023, many investors doubted that Argentina could avoid a new restructuring (even analysts at Oxford Economics predicted a soon and certain default for Argentina), especially given the size of the maturities planned for 2025. However, Milei’s commitment to market reforms has driven a significant rally in the country’s sovereign bond priceswith the risk premium or country risk falling from more than 1,500 basis points in August to 560 currently, a new minimum that has not been seen for seven years.
Despite this progress, the payment marks the start of a more demanding debt schedule for Argentina, with similar obligations twice a year until the end of Milei’s term in 2027. According to the FTAlthough gross dollar reserves have grown strongly, the Central Bank’s net foreign currency reserves (short-term liabilities are subtracted) are approximately $6 billion negative (a better situation than a few months ago, but still vulnerable), which adds pressure to the government’s economic measures. As the British media points out, although the country’s risk has decreased, The challenge lies in sustaining this pace in an environment of growing payments and limited reserves..
He FT In his report he highlights the drop in country risk in Argentina. “Milei’s free-market reforms and growing expectations that it will pay down debts have fueled a big rally in Argentina’s sovereign bond prices in recent months.”highlights the prestigious British newspaper. However, Thursday’s payment marks the start of a more demanding debt schedule for Argentina, with similar amounts now falling due twice a year until the end of Milei’s term in 2027, increasing pressure on its program. Argentina’s central bank’s hard currency reserves, excluding liabilities, are in the red by about $6 billion, according to private economists.
“Things become more complex from now on after making relatively small payments in recent years,” says Salvador Vitelli, head of research at financial consultancy Romano Group. The government has already “practically covered” a $4.3 billion payment due in July with allocated reserves and a $1 billion repurchase agreement with international bankssays Fernando Marull, director of the economic consultancy FMyA based in Buenos Aires.
“After that, they will need to return to the market, or negotiate repurchase agreements or refinance maturities,” comments this expert. “And the fall [de la prima de riesgo] has opened a window to do so” that did not exist before. That is, Argentina would be able at this time to issue debt in the markets at a high interest rate, but that can already be sustainable if the Government maintains fiscal balance and surplus. primary.
Although Investor confidence has been reinforced by the end of the recession in Argentinaa sharp drop in the monthly inflation rate, and Milei’s strong approval ratings, several key challenges lie ahead this year. Among them, the midterm elections at the end of 2025, when Milei hopes to persuade Argentines to continue with his orthodox program in the long term.
Lift the exchange rate
Milei’s government hopes to lift Argentina’s strict currency and capital controls later this year and obtain a new loan from the IMF, to which Argentina already owes 43,000 million dollarsto replenish the central bank’s scarce reserves. The government may also face pressure from the opposition in Congress in the coming months to annul a presidential decree that allows the Economy Ministry more flexibility to renegotiate sovereign debts.
“That decree had freed Milei [de una ley que pone] a strict restraint on the government’s debt management, and if it is voted against, it could make debt refinancing quite difficult,” says Vitelli in statements to Financial Times. Argentina’s bonds have generated capital gains of more than 100% for investors in 2024. Milei’s plan has skyrocketed the price of the country’s bonds, which has generated significant benefits for those who had dared to invest in Argentine debt .
“We had an extraordinary year on the long side in Argentina,” says a hedge fund manager who owned the bonds, but has reduced his exposure this year. “The truth is that I would not dare to be short in Argentina: there is good news to come. But the real heavy lifting of the returns was in 2024,” says this expert.
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