Fernández administration makes first domestic bond issues

Fernández administration makes first domestic bond issues

06/01 - 13:12 - In an effort to find fresh funds to honour short-term obligations, the government of the president, Alberto Fernández, has successfully taken initial steps into the domestic bond market. This is the first time that the government has been able to place debt in the domestic bond market since August, when the administration of Mauricio Macri (2015-19) announced a reprofiling of short-term public debt.

Even though the Fernández administration also mandated a reprofiling of debt on December 20th—postponing payments on US$9bn worth of dollar-denominated bonds until August 2020—it did not close the government off to debt markets, as had been the case a few months ago. Institutional investors are now sanguine about policy under a Fernández administration, following the passage of fiscally prudent economic measures. The government also decided to scrap a controversial capital gains tax on financial investments.

The tax had been implemented in 2017, but it made only a meagre contribution to tax revenue (around 0.15% of the total in 2018) and was widely criticised by the domestic financial community. Therefore, the repeal of the tax does not harm fiscal accounts, but instead serves to send a positive signal to markets. The government has thus far made two debt issues.

On December 19th the Treasury issued Ps18.8bn (US$313m) in short-term bonds with a six-month maturity at a coupon rate of 44.8%—just 300 basis points over the BADLAR interest rate (a rate on short-term bank deposits over Ps1m). Soon after, on December 27th the Treasury issued Ps18.2bn in bonds of two classes: Ps12.4bn in 95-day bonds at a coupon rate of 43.04%; and Ps5.8bn in 175-day bonds at a coupon rate of 43.58%.

In both cases, despite some participation by public-sector enterprises in the bidding process, the bonds were oversubscribed. The debt placements sought not only to service debt that had fallen due by end2019, but also to help to rebuild a new yield curve for pesodenominated, short-term sovereign bonds. The pragmatic approach of the Fernández government to policymaking so far also bodes well for the cost of acquiring debt in the future.

After peaking at a sizeable 8,660 basis points on December 5th, Argentina's five-year credit default swap rate (CDS rate, a measure of the country risk premium) has been consistently trending downwards, reaching 4,870 basis points on December 31st. Impact on the forecast There are some upside risks to our economic forecasts. However, our forecasts remain unchanged pending ongoing debtrestructuring negotiations.

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