Argentina: Fair Weather Friends

Source: The Emerging Market Adviser
By: Walter Molano

After being considered to be a pariah and the scourge of the asset class for more than a dozen years, Argentina is now Wall Street’s top pick. Of course, it helps that it is the most prodigious issuer in the emerging world, but then again, who’s counting? Provinces with few industries, exports or natural resources are being peddled to investors around the world. One of the big surprises is the renewed enthusiasm for the GDP warrants. During Economy Minister Alfonso Prat Gay’s tenure, the government announced that it was launching a collar for the warrants. This created a virtual floor for the instruments, despite their low intrinsic value. Half way through last year, the government issued almost $3 billion in bonds to execute the operation. The transaction, unfortunately, was never completed, but the prices for the warrants remained firm. By the end of the year, Prat Gay was gone, the ministry was reorganized and the warrants began to drop. Now, there are rumors that the operation may be revived. Moreover, the most recent macroeconomic data showed that the economy was showing some signs of life. The level of economic activity in November was up 1.4% on a month-to-month basis, but down 1.4% on a year-to-year basis. The latter is the more important metric, given that it teases out seasonality factors. Still, it was enough for the Argentine bulls to bang on their drums. Local economists are expecting GDP to grow 2.5% y/y to 3% y/y in 2017, but some international analysts are calling for a growth rate of almost 4% y/y. They remind us that the GDP growth rate needed to trigger the payment of the warrants is 3%. However, they seem to have forgotten that there were actually three conditions that were necessary to make the payment--and that is not going to happen for a long time.

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