Investors issue a vote of confidence in Macri

Investors issue a vote of confidence in Macri

Argentina’s 100-year bond is a bold statement of intent for reform


Even by the volatile standards of emerging markets, Argentina’s sale of a 100-year US dollar- denominated bond is a spectacular turnround. Just two years ago, the country — a serial sovereign defaulter — was a pariah in international markets. It is little more than a year since it reached a settlement with foreign bondholders to regain access to global credit. Now it seems investors are queueing up to lend again.

This is a deserved vote of confidence in Mauricio Macri, who has acted swiftly to set the economy on the right course and secure its rehabilitation since his surprise victory in the 2015 presidential election. His economic team has dismantled capital controls, floated the peso and has been prepared to raise interest rates sharply in order to tame inflation.

There is hope the country could gain a further stamp of approval this week when MSCI, the index provider, updates its rankings: Argentina was relegated to the status of a frontier market in 2009. If it regains its place in the dominant EM index, many more funds would be free to put money into Argentine equities.

Even if investors are increasingly persuaded that Argentina is on its way up, they should not underestimate the scale of the task Mr Macri’s government still faces. The next stages of his reform programme will be far tougher to carry out. Inflation is set to fall to around 20 per cent, down from 40 per cent at the end of last year, but pushing it down much below that will be more challenging. And Mr Macri will want a strong endorsement from voters in October’s midterm elections before tackling difficult issues such as tax reforms.

The overarching challenge, however, is to restore order to the public finances. Mr Macri is rightly realistic about the place at which he can pursue fiscal consolidation without losing popular support. He is determined to end previous governments’ habit of printing money to finance deficits. Borrowing on international capital markets is the only way to buy political space until economic growth picks up and reform starts to pay for itself.

It is fortunate, then, that market conditions are in his favour. This week’s sale says almost as much about investors’ short time horizons and limited alternatives as it does about Argentina’s particular circumstances.

Institutional investors are hungry for yield and apparently undeterred by the prospect of rising US interest rates. There could be no clearer sign of risk appetite than Russia’s ability to issue long-dated sovereign debt, while still subject to western and US sanctions.

Against this backdrop, Argentina’s 100-year bond is not such a stretch. After all, at an 8 per cent yield, investors will earn their money back in about 12 years, making it in some ways more attractive than apparently safer alternatives. Moreover, the worst of the country’s problems may lie behind it. Its trajectory is more promising of any large country in the region, with Brazil mired in corruption scandals, Mexico under threat from US protectionism, Chile facing a potential ratings downgrade and Venezuela sinking ever deeper into the morass.

These favourable conditions may not last. Investors could be underestimating the Federal Reserve’s resolve to restore “normal” monetary conditions. When a carry trade goes into reverse, there can be considerable collateral damage as investors rush to the exit.

But Mr Macri is to be commended for taking his opportunities. Argentina’s century bond is a bold statement of intent from a president who offers the country its best hope of change for a generation. es un sitio web oficial del Gobierno Argentino