Mathieu Racheter, Emerging Markets Strategy Research, Julius Baer ! While the new bonds may continue to benefit from a weak US dollar and the lower-for-longer global rate environment, the challenging economic outlook and ongoing uncertainty around the IMF talks will likely cap the yield compression potential.
After several weeks of intense negotiations and a final deal with bondholders, the new Argentinean sovereign bonds have started to trade on the official market this week. The current high yield, standing around 11%, reflects the large credibility shortfall that the government still needs to address. The next important step for investors will be talks with the International Monetary Fund (IMF), which are already up and running. Economy Minister Martín Guzmán said that he will look for a programme that allows for the rolling over of upcoming maturities with the IMF and wants the deal to be backed by Congress (although this is not mandatory) to have a wider political validation of the policies.
Given the bleak economic outlook, the Argentinean government is pressured to use fiscal stimulus financed by the central bank, which results in a slow fiscal adjustment. Given the diverging views on the degree of fiscal consolidation needed and growing concern about central bank financing, the IMF will likely demand a more stringent monetary policy than otherwise. Moreover, the IMF will likely also demand structural reforms, the most crucial of which is labour reform. Overall, uncertainties around the outcome of the IMF talks will linger for the coming months, and compromises have to be made at both ends to get a deal done.
Meanwhile, fundamentals remain weak given the country’s bleak economic outlook, overvalued currency and hyperinflationary environment, which will likely last for longer, as Argentina continues to print money to finance pandemic spending since it cannot borrow from abroad.. While the new bonds may continue to benefit from a weak US dollar, the lower-for-longer global rate environment, as well as the inclusion in the EMBI+ spread benchmark index, which will occur on Thursday, the challenging economic outlook and ongoing uncertainty around the IMF talks will likely limit the yield compression potential beyond 10%.