EMTA Special Seminar: A New Argentina? (NYC) - Feb. 3
EMTA SPECIAL SEMINAR: A NEW ARGENTINA?
Wednesday, February 3, 2016
Hosted by
One Bryant Park, 2nd Floor Auditorium
(42nd St. and 6th Ave.)
New York City
2:30 p.m. Registration
3:00 p.m. Ratings Panel
Jane Brauer (Bank of America Merrill Lynch) – Moderator
Erich Arispe (Fitch Ratings)
Gabriel Torres (Moody's Investors Service)
Joaquin Cottani (Standard & Poor's)
4:00 p.m. Panel Discussion
Alberto Ades (Bank of America Merrill Lynch) – Moderator
Casey Reckman (Credit Suisse)
Patrick Esteruelas (EMSO)
Hans Humes (Greylock Capital Management)
Javier Kulesz (Jefferies)
Additional Speakers to be Announced.
5:00 p.m. Cocktail Reception
Additional support provided by Credit Suisse and Jefferies.
Registration fee for EMTA Members US$95 / US$695 for non-members.
We regret that this event is not open to the media.
Online registration for this event is now closed. If you wish to register, please contact Suzette Ortiz (sortiz@emta.org).
Special EMTA Seminar Focuses on Argentine Economic Potential
Over 175 EMTA members and guest attended a seminar on recent economic and political developments in Argentina in New York on Wednesday, February 3, 2016. Bank of America Merrill Lynch hosted the event in its midtown Manhattan headquarters.
Jane Brauer (Bank of America Merrill Lynch) moderated a panel of ratings agency experts, leading them through a discussion of Argentina’s ratings prospects and economic progress. Erich Arispe (Fitch) discussed whether official fiscal targets from the new administration were realistic, and noted that whether revenue targets would be reached remained an important question “It’s early in the game to see if there is political support for President Macri’s economic program,” he added.
“The government needs to reduce subsidies to meet its fiscal targets,” stressed Joaquin Cottani (Standard & Poor’s). He voiced concerns at a gradualist approach to reforms; “the fiscal problem has to be solved soon, rather than slowly…there is no room for gradualization,” he argued. Cottani specified that pensions and subsidies, “which exploded in recent years,” have to be deflated away, and could not realistically be cut nominally.
Gabriel Torres (Moodys) observed that while much analyst chatter focused on Macri’s honeymoon period, some Argentines had already protested new economic measures. However, such disagreements were muted thus far, and had not gained traction, with a large part of the Peronist movement remaining quiet. Perhaps in March, when the administration was in its 100th day, “things might get real,” he suggested; this would be when Congress returned and salary negotiations began.
Cottani believed that the government had used part of its honeymoon period to manage expectations. He expected inflation in 2016 to reach 40% (exceeding official projections), and growth to be 0%, but that the stage could be set for less inflation and an economic take-off in 2017. On the other hand, Cottani agued, if the fiscal deficit wasn’t cut, the second year of the Macri administration would be worse than a muddle-through 2016.
Analysts discussed which countries they saw as possible comparisons to Argentina. Arispe noted that his firm’s historical comparisons to Argentina were in the ‘B’ category, such as Jamaica, Ecuador and Nicaragua. Torres followed up that Argentina’s problems were more political than Jamaica’s, and offered that an improved political solution could infer a higher rating for Argentina than a country with more challenging debt dynamics; he specified that the hold-out issue remained the “largest stumbling block to a ratings change.” Cottani pointed out that its local-currency rating on Argentine debt had recently been upgraded to B- from CCC+, and echoed comments that resolution of the hold-out issue remained critical to an upgrade of external-debt ratings (he expressed confidence that progress would be made in 2016).
Brauer asked speakers to speculate where Argentina could be, ratings-wise, in 4 years. Torres noted that if Argentina were to hope for investment-grade status, his firm would evaluate a number of steps, such as Argentina’s movement on the hold-out issue, and an improvement of official statistics. Subsequently, it would monitor the political opposition and its economic proposals (“in investment grade countries, we don’t have opposition parties that we fear could destroy the economy”).
Bank of America Merrill Lynch’s Alberto Ades then led a discussion on Argentine prospects with a panel of strategists and investors. Ades questioned whether the Macri administration could meet heightened market expectations, and if political realities had been factored in, and asked for panel opinions.
Javier Kulesz (Jefferies) first praised the new government for “being aggressive advancing many critical reforms that were left unaddressed for years.” Kulesz specified that the lifting of FX controls had been extremely successful, and that recent moves on electricity subsidies further earned credibility for the government—“we should be pleased by the actions over the last two months,” he underscored. Kulesz replied to Ades’ question that, in fact, the government would be able to deliver, and that President Macri had shown a willingness to expend political capital to get results. “This is the first time in my life I’ve seen the [Argentine] government with officials who are putting the country’s interests ahead of their own,” he emphasized. On the other hand, one needed to monitor external risks, such as the effects of Brazil’s economic contraction, and the fall in soybean prices.
Kulesz argued that former President Fernandez de Kirchner “spent like mad” to maintain popular support, and there was “plenty of fat to be cut” from public expenditures. He acknowledged some disappointment, however, with the government’s fiscal plan. “I would have wanted to see more; it might be too gradual….but maybe they want to under-promise and over-deliver. Credit Suisse’s Casey Reckman concurred in her generally positive impression of economic progress, though observed she would like some more details on fiscal plans.
Patrick Esteruelas (EMSO) focused on political issues, reminding attendees that the President’s approval ratings were in the 70s. Thus far, the government has been clever politically, and seems to be willing to create working alliances (such as enlisting opposition leader Massa to help sell Argentina to investors in Davos). The announcement of 18 Congresspeople switching their alliance, announced just as the seminar started, was likely to prove a positive development, as there appeared to be a general gravitation towards the winning ticket. Macri has ingratiated himself with governors, a helpful strategy for the Senate—“he’s shock and awed the governors, after years of being ignored by the former president.”
The risks to the new enthusiasm for Argentina were a failure to complete a deal, or failing to conclude one quickly, according to Reckman. “I’d like to see significant progress before Congress returns in March, so the government can use its political capital. I would emphasize that they need to do this early, because, without a deal, all the economic targets cannot be met,” she stated. Her base case remained that an agreement would be reached, although she would grow concerned if it didn’t happen by end of the 1H. She agreed that weakness in Brazil—and in the BRL— remained an issue.
On the other hand, “we are less concerned by wage negotiations; we always seem to get through them, despite worrying about them every year.” She speculated that most unions would agree to increases of 25 to 30%, which she would consider a positive development.
Hans Humes, of Greylock Capital Management (and also co-chair of the Global Committee on Argentine Bondholders) confirmed that he was “more optimistic now than in recent time; I’ve been surprised positively by the Argentine government.” While both sides now have signaled their interest in resolving the stand-off through negotiation, there could be a domestic political risk if the government was viewed by the populace as concluding a deal too quickly.
The Italian retail bondholder agreement, announced the day before the EMTA event, was handled “elegantly” in Humes’ estimation. “They addressed the concerns of Task Force Argentina, and they demonstrated a constructive approach, which is a good sign for the US holdouts.” The speed at which the deal was concluded surprised Humes, he admitted, and it added pressure for US bondholders to reach a settlement.
Humes highlighted that a deal would not just unlock new demand for Argentine debt, but would also attract FDI into the country. He dismissed concerns of a potential post-deal oversupply of Argentine paper, emphasizing the debt held wide appeal as a “turnaround” story.
Esteruelas concurred with Reckman that a settlement in the near term was preferable, stressing that “political capital was an exhaustible commodity.” He added that a long delay might prompt an acceleration of debt by exchange bondholders, although Humes strongly disagreed, calling acceleration “attractive on paper…but just not practical.”
Esteruelas anticipated Argentina needs of between $12 and $17 billion in market financing, which could be placed both in local and external markets, and, despite the recent rally, he still saw Argentine debt as offering value.
Speakers discussed their recommendation on how to best play the Argentine story. Kulesz believed that exchange bonds (specifically the par bond) had not fully priced in a successful deal. Humes saw FDI opportunities in infrastructure projects, with Esteruelas also seeing agricultural FDI potential. Most speakers also recommended GDP warrants (which Ades noted was a Bank of America Merrill Lynch recommendation as well). Kulesz expressed his own skepticism on expected FDI inflows, suggesting the market might be too optimistic at this stage, and stating that investors would need to be assured that the political pendulum would not swing dramatically in future years.
Humes discussed the implications of Court decisions in the Argentine case, but refuted that the new ruling on pari passu had wide implications. “This was a stand-alone decision based on Argentina’s behavior…it was a very specific decision to the NML case,” he affirmed.
Finally, speakers debated where Argentine debt could trade, post-deal, when “apples to apples could be compared.” Reckman believed that convergence to at least Brazilian levels could occur. Humes again brushed off talk of oversupply of new debt. “Argentine debt will leave distressed accounts, but that will be more than offset by its increased importance in indices, which will attract new buyers,” he asserted.