As Argentina prepares to launch a new bond issue in April, marking its return to international capital markets, investors are once again turning their attention to Buenos Aires, which has known 15 years of isolation.
The bond issue could, in theory, mark the beginning of a new love story between a country with a massive need for capital and investors who are having a harder time than ever pinpointing opportunities in Latin America. But many things must fall into place for that to happen, starting with economic growth.
The new government, led by Mauricio Macri, has announced several deals with holdout creditors since it came to power in late 2015. It’s expected to sell up to $15 billion worth of bonds, with a 7% yield, by mid-April to pay most settlements. Argentina has still to change laws that block it from repaying creditors, and a US judge overseeing Argentina’s litigation with hedge funds must lift injunctions forbidding the country from paying. If all that goes through, rating agencies will look quite differently at a nation that’s been out of the international capital market since a record $95 billion default in 2001.
“If that happens, there will be, in principle, an upgrade for Argentina’s rating…. We have indicated that it will be something around the B category,” said Gabriel Torres, Moody’s sovereign analyst in Buenos Aires. Moody’s changed its outlook on the current CAA1 rating to positive in November right after Macri was elected.
But peace with international investors is just a first step in restoring economic health. The government is solid, but tensions persist. Miguel Galuccio, CEO of state oil giant YPF, was asked to step down in March over a disagreement with the new government. More generally, a high fiscal deficit and 30% to 35% inflation are two issues Argentina must tackle to avoid a fall from grace.
“There is a bet that, by 2017, the economy will be growing again, while it is not growing now. If that happens, they [the government] will be in a very strong position. If instead there is a second year of recession and inflation remains high, then…[the] approval rate will fall very quickly,” Torres said.