Argentina’s New Currency Crisis: What Happened This Time?

The peso crisis in Argentina: A risk analysis. What happened this time? Is any comparison with the previous crisis (1998 – 2002) possible? What impact could we expect in the close-term for President Mauricio Macri and the country’s political stability? The article tries to give some clues on what might be going to happen in the South-American State.

A history of debt crises

Argentina is no stranger to currency and debt crises. In the 20th century, periods of economic growth often led to trade deficits, pressure on the currency and the hasty adoption of fiscal austerity to tamp down the economy, creating an impoverishing and tiresome cycle of boom and bust. After a bout of hyperinflation in the 1980s, Argentina attempted to stabilize the Argentine peso by tying it 1:1 to the dollar in 1991 (the Convertibility Plan). Though successful in the short term, convertibility went disastrously awry at the century’s turn.

Argentina’s contemporary problems are a typical currency crisis. Those who hold Argentine pesos or peso-denominated assets are selling, partly to buy US dollars and dollar-denominated assets because the US Federal Reserve is raising interest rates. Argentina also runs a fiscal deficit, which it has to finance in dollars or another hard currency. As the peso falls, that debt becomes harder to service, increasing fears of default and creating a cycle of ever-increasing pressure on the peso. As the peso falls, prices rise – inflation currently runs at about 30 percent per annum.

The Argentine central bank attempted to stem the pressure on the peso by raising interest rates to extraordinarily high levels – they reached 27.25 percent at the end of April, and 40 percent in the first week of May. However, the peso continued its decline. The International Monetary Fund (IMF) was created just for situations like this. The Argentine government in May appealed to the fund for credit to reassure investors, obtaining a credit line of $50 billion, which the state can use to ensure its debts are paid and to support the peso. In return, the Fund has mandated Argentina take steps to reduce its budget deficit through fiscal austerity, including cuts and the reintroduction of taxes on exports. Argentina announced it would speed up this fiscal tightening on September 3.

Argentinian politics: A turn to the right

During the first decade of the 21st century, Latin America was seen as undergoing a left-wing transformation, with governments of varying left-wing ideologies, identities and programs coming to power in the majority of the region’s states. Since 2015, by contrast, there has been a turn to the right.

Argentina’s initial drift to the left began after the convertibility crisis of 1998-2002, which saw extreme austerity, an explosion in poverty and unemployment and the total discrediting of the IMF and economic orthodoxy more generally. The left turn in Argentina was represented by Néstor Kirchner (1950-2010), president between 2003 and 2007, and Cristina Fernández de Kirchner, his wife and successor as president between December 2007 and December 2015. The Kirchners introduced subsidies for utilities and public services, wage increases and, under Fernández de Kirchner, the nationalization of private pension funds to support public spending. Fernández de Kirchner also introduced capital controls, limiting the ability of peso-holders to exchange or sell their pesos on the open market, and thus the peso’s depreciation.

The Kirchners kept the peso reasonably stable, but prosperity during their tenure depended in large part on high prices for Argentine commodities (most notably soybeans). They also presided over a prolonged period of high inflation and considerable levels of corruption. In the 2015 elections, when Fernández de Kirchner could not run again, her left-Peronist faction ran Daniel Scioli, who in turn lost narrowly to Mauricio Macri, the mayor of Buenos Aires and representative of a center-right coalition, Cambiemos.

Macri succeeded in reducing subsidies and returning Argentine bonds to global markets – the country had been unable to borrow openly after the 2001 default. He also deregulated the finance sector. However, his attempts to cut inflation failed, while Macri failed to attract foreign investment. The currency crisis makes it harder for him to argue that his orthodox, conservative economic policies will succeed in restoring Argentine prosperity.

Economic risks

The immediate worry would be that Argentina would again default on its obligations. How likely is that? Well, the fact that the IMF credit line hasn’t prevented increasingly extreme attempts to reassure markets is certainly a bad sign. The Argentine central bank raised interest rates to a dizzying 60 percent at the end of August. There are significant doubts that Argentina will be able to meet the inflation and budgetary targets the IMF demands in return for its help.

The IMF learned during the 2001 crisis that it does not pay to continue supporting a country that is obviously going to become insolvent, so it is certainly possible that the IMF will cut off support – perhaps up to a 50 percent chance over the next year. This means that the danger of an Argentine default in the next year is probably almost as high, as it’s unclear who else might fund Argentina’s deficits.

Political risks

The immediate concern would be the sort of political chaos that attended the 2001 default. This led to a popular uprising and the flight of President Fernando de la Rúa from the Casa Rosada. The chances of this happening over the remainder of Macri’s current term (i.e. between now and December 2019) are probably very low – under 10 percent. The main reason is that the trigger for de la Rua’s downfall was neither inflation nor a default, but his order to freeze bank accounts (which prevented people from withdrawing their pesos and buying dollars). Macri is unlikely to issue a similar order simply to avoid recalling that precedent; rather, like Fernández de Kirchner, he would probably try to limit access to dollars in other ways.

The second political risk, especially from the purview of foreign investors, is Macri’s losing the next presidential elections, due at the end of 2019. This depends on a number of factors. Will Macri continue to pursue austerity and risk a recession, or limit cuts in a bid to save voters some pain?  Will Cristina Fernández de Kirchner be able to run, or will she be barred, legally or practically, by corruption investigations?

Because many Latin American countries do not allow presidents to run for immediate consecutive terms, there are relatively few precedents to apply. Macri is not accused of epic-scale corruption; indeed, his government has been rather vigorous in pursuing graft cases. His economic record is poor, but Fernández de Kirchner’s was not emphatically better. Given that Macri won his first term by a margin of three percent and his poor economic record, the chance of a left-wing victory would probably fall between 40 and 55 percent.

Will Stocks Keep Rising And The Peso Finally Stabilize After The Latest Rate Hike In Argentina?

The Banco Central de la Republica Argentina surprised markets by hiking its policy rate by 100 basis points to 28.75% on November 7. This is the third rate hike by the central bank in its monetary tightening cycle which began in April this year.

Inflation has been stubborn, leading economists surveyed by the central bank to increase their expected reading of the metric to 23% from 22% by the end of the year. Apart from that, the bank hiked rates in anticipation of upward pressure caused by a scheduled increase in natural gas and electricity prices later in the year.

Though the central bank has already missed its inflation target for the year, it expects its contractionary stance to get price rises back on track and achieve the 10% (plus or minus two percentage points) targeted level for next year.

But can this hike support the sliding peso?

Impact on the Argentine peso

The Argentine peso has been sliding against the US dollar as shown in the graph below.

For a country which seems to be getting back on track economically, this seems odd. Normally, when a central bank hikes rates, it strengthens the local currency. However, in the case of Argentina, this has not been the case. Even after a cumulative 400 basis point increase in the policy rate this year so far, the peso has continued to weaken.

The primary reason for this is inflation, whose expected upward rise can result in a downward pressure on the currency.

Until budget and trade deficits firm up, there is little reason for the peso to strengthen despite the structural reforms and monetary policy decisions being taken.

But what about equities?

Argentine equities: Continuing to soar?

Except for certain phases, Argentine stocks have done quite well for themselves in YTD 2017. The benchmark Merval index is up 66% for the year. For overseas investors, the returns have been reduced by a weak peso, but gains are still considerable. Those holding the Global X MSCI Argentina ETF (ARGT) would have seen their investment soar by 42% in YTD 2017 until November 7.

Between the Merval and the ARGT, the index has much higher exposure to stocks from the energy, materials, and utilities sector than the latter, while the ETF has a significantly higher exposure to stocks from the industrials and consumer staples sectors compared to the former.

The strong performance of stocks like Pampa Energía (PAM), Transportadora de Gas del Sur (TGS), Transener, and Transportadora Gas del Norte (TDGDF) from the energy and utilities sectors – the two largest sectors comprising the Merval – have helped it gain this year.

On the other hand, information technology and financials have been the primary drivers of ARGT, led up by Mercadolibre (MELI), Banco Macro (BMA), and Grupo Financiero Galicia (GGAL).

A rate hike has a negative impact on some sectors, but the stock market has been responding to economic and structural measures taken by the government. Thus, Argentine stocks may continue to rise further.

The ARGT has seen net inflows amounting to $62 million in YTD 2017. There were some outflows in August and September, placing a question mark on the stocks’ attractiveness, but in October, investors displayed enhanced interest in the fund.

There may be some good news for fixed income investors as well. Higher than expected inflation may lead to a rise in yields of longer-term bonds such as the one plotted above, thus providing a buying opportunity.

Investors in the country’s 100-year bond need not do anything, though.

Argentina Had Only Three IPOs Since Macri Took Office, But The Boom is Coming

IPO markets surged

The equity offerings market in Argentina touched a 3-year high in 2017 with 17 new deals (IPOs, FPOs and private placements) announced.

New share offerings had been slow to take off since President Mauricio Macri took office in 2015 with just 9 offerings in 2015 and 2016. This includes 2 international IPOs in the United States and one locally listed IPO. The rest in this period were all follow-on offerings.

Even though the Argentinean benchmark Merval Index nearly doubled since Macri took over, Argentina’s stock market has failed to attract IPOs, as valuations have remained low compared to other emerging markets. MSCI’s decision to decline emerging market status to the country also acted as a deterrent to investments in local stock markets.

Since 2015, the Global X Argentina ETF (ARGT) is up 71% while the MSCI Argentina Index has gained 81%. In comparison, the Merval Index has surged 223% during the same period.   

President Macri’s reformist policies aimed to open up the economy have gained much appreciation from the international investor community. The country’s inflation target of 12-15% by end of 2017 seems achievable and GDP has grown by 0.7% in Q217. Consumer confidence has also rebounded, driving equity markets to fresh highs.

Daniel Patron Costas, head of investment banking at Banco Santander Rio SA, expects Argentina’s IPO markets to pick up in 2018 as valuations begin to rise. “Issuers are looking to see if their valuations are the highest they can be,” he said in an interview to Bloomberg. “The IPO boom might not be in 2017, but 2018 should be the key year,” said Costas.

According to Bloomberg, nearly 17 offerings (including primary and second issues) have been announced in 2017 so far, with an aggregate deal value of $7.1 billion. Of these, nearly 59% of IPOs were from the financial sector, while telecommunication and industrial companies made up 23% and 12% of IPOs.

Is the tide turning for Argentina’s IPOs?

Over the next 18 months, Santander expects nearly 6 international IPOs, primarily in the energy, infrastructure and agribusiness sectors.

There are several large IPOs already in the pipeline to be listed in 2017. These include Loma Negra, Genneia, Cañuelas Mill, Central Puerto, Corporacion America and TGLT. Technology companies dominate the list of IPOs after the successful listings by Despegar, Globant and MercadoLibre earlier this year.

Upcoming IPOs To Look Out For

Argentina’s equity markets have picked up in 2017 with 17 offerings (including IPOs, private placements and FPOs) in 2017 so far, and around 6 companies slated to list abroad over the next six months. As per Bloomberg, five companies alone may raise up to $2.8 billion. This is the highest number of IPOs since 2007 when four Argentinean stocks raised $1.6 billion. Large companies like Loma Negra, Molino Canuelas Sacifia, and TGLT are seeking listings in the United States.

  • Loma Negra Cia Industrial Argentina – Cement maker Loma Negta plans to raise $800 million in a dual listing in New York and Argentina. The company will offer $50 million ADRs with each ADRs representing five common equity shares of the company. The shares will be priced at a range of $15-$19. The IPO was filed in September 2017, and will get priced on October 31. Proceeds from the IPO will be used to fund the expansion of Loma’s L’Amali plant in the Buenos Aires region.
  • Molino Canuelas SACIFIA – Leading flour and oil producer Molino Canuelas aims to raise $100 million in a public listing on the New York Stock Exchange. The company filed for an IPO in September 2017 and has selected Itau BBA, JPMorgan, and UBS as book runners for the offer. Molino Canuelas seeks a dual listing in New York as well as Argentina. Details of the IPO are yet to be announced.
  • TGLT – TGLT aims to raise $50 million in a public issue on the New York Stock Exchange. The company filed its IPO in in June 2016 with the SEC. Leading investment banks JP Morgan, Morgan Stanley, Santander and UBS are underwriters to the IPO. Pricing details are still to be announced. The company’s shares have been trading on the Argentinean stock exchange since November 2010 and are up 84% since debut.

Historical performance of Argentina IPOs under Macri

Since 2015, Argentina’s companies announced merely 13 IPOs (primary offerings), of which 6 were announced in 2017.

  • Despegar.com, (DESP)(D3G.F) Latin America’s leading online travel agency raised $381 million in a public listing on the New York Stock Exchange in September 2017, making it the largest IPO under Macri’s Presidency. Despegar.com offered 12.8 million shares priced at $26, the high-end of the offering range of $23-$26. Despegar.com, which sells airline tickets, travel packages and hotels in 20 countries around the region, was valued at almost $2 billion after its successful IPO. The IPO was 13.4x oversubscribed and the stock hit a high of $31.50 on its first day of trade. Prior to the IPO, leading travel portal Expedia owned 16.4% of Despegar that it bought in 2015, while US Hedge fund Tiger Global Management owned 57.3% stake. Offer to date, shares of the company have appreciated 15.4%.

  • Grupo Supervielle’s (SUPV.BA)(SUPV) raised $301 million IPO in June 2016 in a dual Listing in New York and Argentina. The company’s ADRs have returned 132% to date since then, while its Argentina listed shares have returned 135%. Grupo Superveille was the first Argentinean company to get listed abroad since 2010, signaling a turn in investor sentiment. The company’s ADRs were offered at $11-$13 while its common shares were available in Argentina for $2.20-$2.60.

  • Havanna Holding (HAVA.BA), an Argentina based confectioner raised $11.5 million in a public listing in June 2016. The company issued 4.27 million shares, equating to 10 percent of the company at 37 pesos per share, valuing the company at around $114.7 million. The IPO was 2x oversubscribed, with 17% of applications coming from foreign investors. Havanna’s offering was the first solely local equity offering since the Petrolera Pampa’s IPO in 2013. Since the offer, shares of the company have declined 4%.

These 3 Argentinean Banks Are Set For Big Gains If Macri’s Reforms Begin To Pay Off

Macri’s reforms will drive Argentina’s financial sector

Argentina’s (ARGT) banking system is gradually returning to normalcy after a long history of financial crises. Argentina’s government has undertaken several reformist measures to build investor confidence into the country’s financial markets. These measures are aimed at solving macro stress points including bringing down the country’s double-digit inflation and high fiscal deficit.

President Mauricio Macri’s reforms such as removing capital and trade controls seem to be paying off. Financial activity is picking up in the country, while inflation has been declining steadily. Argentina has finally come out of a recessionary phase as the country recorded GDP growth in the last two quarters of 2016.

Measures related to strengthening policy making institutions, public infrastructure spending, investments in the energy sector and growth in exports have led to Standard & Poor’s upgrade Argentina’s long-term sovereign credit ratings from B- to B. The rating agency forecasts GDP growth of 3% in 2017 and expects inflation to decline to 20% from 40% in 2016.

Improvements in these macroeconomic indicators will likely boost Argentina’s financial sector.

Leading Argentina-based banks have seen loan portfolio growth of above 20%, and higher financial activity in trading and asset management related activities. Argentina’s regulatory authority recently issued an operating license to Brazil’s BTG Pactual, the largest independent investment bank in Latin America (ILF) to enter Argentina’s banking sector. Creditcorp, LarrainVial and Goldman Sachs Asset Management are also queuing up for operating licenses in Argentina according to a report by the Financial Times. Furthermore, local retail banks are also raising equity to expand their operations. BBVA Frances (BFR) raised $400 million through an FPO (follow-on public offer) recently while Banco Macro (BMA) raised $666 million.

The Argentinean banking sector is primarily dominated by a handful of large national banks. The top three banks in the country held nearly 80% of total assets in 2016, making it highly concentrated. These banks also represent nearly 79% of the total loans.

Morgan Stanley (MS) sees significant opportunity in Argentina’s banking sector, as credit penetration remains considerably low in the country when compared to the region.

Currently, credit is merely 16% of Argentina’s GDP, compared to a historical average of 25% in the 1990’s and 35-40% for Latin American peers. However, Fernando Sedano of Morgan Stanley warns that inflation needs to decline for credit growth to take place. “Inflation is the key. Once it gets into single digits credit can increase at a much stronger pace,” he says, expecting that to happen by 2020.

Banking stocks to follow

Year to date, the MSCI Argentina Index has declined 5% while the MSCI Argentina Financials Index has surged nearly 50%. Comparatively, the Argentina benchmark MERVAL Index has rallied 49.5% in the year so far.

Banks like Grupo Financiero Galicia-B, Grupo Supervielle Sa Cl-B and Banco Macro Sa-B have returned between 70-80% over the year so far, and have outperformed broad market indices.

The largest Argentinean banks by assets are Grupo Financiero Galicia, Banco Santander Rio-B and Banco Macro. In 2016, these banks held assets worth $15.3 billion, $13.3 billion, and $9.7 billion respectively. Currently, shares of these banks have market caps of $5.8 billion, $4.2 billion and $6.7 billion on the Argentinean stock exchange.

Banco Galicia

Banco Galicia is one of the largest private sector banks in Argentina and the largest bank by assets. The bank offers a full range of financial products and services to nearly 8 million corporate and retail consumers. Banco Galicia has one of the largest distribution networks in Argentina, operating through 550 contact points and 200 services centers.

Banco Galicia’s margins have gained from consumption growth amongst the low and middle-income population in Argentina in the past decade. The bank is the largest issuer of consumer credit cards through its subsidiary Tarjetas Regionales. Banco Galicia is also the largest financier to Argentina’s agriculture sector with a market share of roughly 40%.

In June 2017, the bank reported assets of $14 billion (253 billion pesos), loans of $9.5 billion (159 billion pesos) and deposits of $9.3 billion (158 billion pesos).

In 2016, it generated revenues of $3.6 billion and net interest margins of 5.1%. Furthermore, Banco Galicia is also one of the most profitable Argentinean banks. In 2016, the bank reported return on assets of 2.9% and return on equity of 37.3%, highest among peers.

Grupo Galicia Class B (GGAL.BA) shares trade on the Córdoba Stock Exchange and have surged 82% in 2017 thus far. The bank’s ADRs trade on the NASDAQ with ticker GGAL. Grupo Galicia is a constituent of the Buenos Aires Stock Exchange’s benchmark MERVAL Index and also forms part of a number of ETFs investing in Argentinean equities (AGT).

Banco Santander Rio

Banco Santander Rio (BRIO.BA) is the second largest bank in Argentina in terms of assets. The bank held assets worth $13.3 billion in 2016 and has a market cap of $4.2 billion. Banco Santander is one of the largest banks in Argentina with nearly 2.5 million customers, 400 branches, and 7,800 employees.

In 2016, it generated revenues of $2.8 billion and net interest margins of 7.1%. The bank has a loan portfolio worth $7.4 billion and deposits worth $10.2 billion. In 2016, the bank reported return on assets of 2.9% and return on equity of 27.6%.

The company’s Class B shares are listed on the Buenos Aires Stock Exchange and have gained 18.9% in value in 2017 to date. Shares of the bank are also listed on the Madrid Stock Exchange with the ticker XBRSB.MC and on OTC Markets with the ticker BRPBF.

Banco Macro

Banco Macro (BMA.BA) is the third largest bank in terms of assets in Argentina and the largest by number of branches. The bank, established in 1976, serves 3.5 million customers through 445 branches and 1,415 ATMs across Argentina. The bank held assets worth $9.7 billion in 2016 and has a market cap of $6.7 billion, the highest among its peers.

Banco Macro is sixth-largest bank in Argentina by deposits and lending. In 2016, the bank reported assets of $9.7 billion, loans of $5.6 billion and deposits of $7 billion.

In 2016, Banco Macro generated revenues of $2.5 billion and net interest margins of 12.9%, highest among its peers. The bank reported return on assets of 5% and return on equity of 34.4%.

Macro’s large geographical reach is its biggest competitive advantage over its peers. The bank has a dominant market share in export-oriented sectors in Argentina which can generate high returns for the bank as Argentina’s export economy begins to recover.

The bank’s shares are listed on the Buenos Aires Stock exchange and have gained 71% in 2017 to date. Further, the shares are also listed on the Frankfurt, Stuttgart and Berlin Stock Exchanges with tickers B4W.F, B4W.SG and B4W.BE The company’s ADRs have been listed on the New York Stock Exchange since 2006 with the ticker BMA.

Valuations

Generally, banks are valued based on their price to book value multiples, but for Argentinean banks, this ratio may be a misleading indicator. Argentinean banks carry assets denominated in Argentinean pesos on their books that are valued on a historical basis. As such, analysts prefer to use the forward price to earnings ratios to value these banks.

Argentina’s banking sector currently trades at a steep discount to its Latin American peers. Morgan Stanley analysts base their optimism on Argentinean banks on attractive valuations and opportunities for consolidation. Argentina’s banks are currently trading at one-year forward price to earnings of 9-10x, compared to 10-12x for Brazil’s banks, 13-15x for Mexican banks and 16-17x for Chile’s banks according to Morgan Stanley.

However, Andrew Cummins of Explorador Capital Management, a Latin American investment firm believes that valuations of Argentina’s banks are stretched in the short term.

Argentinean banks are currently trading at an average one-year forward price to earnings ratio of 12x. In comparison, the MSCI Argentina Index trades at a forward PE of 16.3x while the MSCI Argentina Financials Index has a one-year forward PE of 13.4x.

Banco Macro SA, Bbva Banco Frances SA (FRAN.BA) And Grupo Supervielle SA (SUPV)(SUPV.BA) are the most attractively priced banking stocks based on their cheap valuations. These stocks have forward price to earnings ratios of 10.2x, 11.2x and 11.7x and are therefore trading at the steepest discount to their peers. Meanwhile, Banco Hipotecario SA (BHIP.BA) and Grupo Financiero Galicia are currently expensive with forward PEs of 14.9x and 12.2x respectively.

Tajikistan and Ukraine Will Put Appetites of Emerging Market Bond Investors To Test

A strong appetite for emerging markets bonds has emboldened both investors and sovereigns. But that appetite will soon be put to the test by Tajikistan.

The small central Asian country is making its international bond market debut with a 10-year dollar-denominated bond. The country, which was not even rated until as recently as the penultimate week of August 2017 is aiming to raise between $500 million to $1 billion from international investors, according to media reports.

On the other hand, the other country mentioned in the previous article in this series, Ukraine, is no stranger to international bond markets. It was recently reported that the country has appointed bookrunners to issue dollar-denominated debt. Ukraine had last tapped bond markets in 2013 with a $3 billion offering.

The countries are on different spectra as far as their respective sizes are concerned. According to World Bank data, the gross domestic product (GDP) of Tajikistan was $6.9 billion in 2016 after reaching a peak of $9.2 billion in 2014.

Meanwhile, the World Bank estimates Ukraine’s GDP at $93.3 billion in 2016, down from a 10 year peak of $183.31 billion in 2013. Its GDP in 2016 was the second lowest in the past decade with the low-point having been seen in 2015.

Even though its economy is over 13 times larger than that of Tajikistan, Ukraine will be testing appetite as much as the Central Asian nation, albeit in a different manner.

The test

Both countries intend to capitalize on investor hunger for yield, and are each going to test that appetite in their own way.

Tajikistan is the second smallest country among the five central Asian nations. It has no track record of raising money overseas, is plagued by infrastructure issues and non-performing loans, and has a severely underdeveloped financial sector.

The country is overly dependent on remittances from abroad; they account for 45% of its GDP according to data from the International Monetary Fund (IMF). Importantly, its proposed issuance will not be guaranteed by any external organization.

Its issue size and cut-off yield will be indicative of the extent to which investors are willing to stretch for returns as well as their comfort in investing in the absolute fringes of emerging and developing countries. It will also set the bar for other smaller countries from the region, specifically Kyrgyzstan and Turkmenistan, as to how the international investment community is viewing their development agenda.

On the other hand, Ukraine is coming off of a geopolitical situation which had seen Crimea being annexed by Russia in 2014. This had hit its economy hard and led it to default on its 2013 loan. The country has been on an IMF bailout program worth $17.5 billion since 2015.

The debt had to be restructured and investors had to accept a 20% write-off. Legal battles ensued and are still ongoing.

However, two things seem in favor of Ukraine: its bond yields have come down significantly; the 10-year yield is below 7.5%, and the country recently received an upgrade from Moody’s which raised its sovereign rating from Caa3 with a stable outlook to Caa2 with a positive outlook.

Unlike Tajikistan, Ukraine is not on the fringes, but its geopolitical situation and the ongoing lawsuit involving debt default will have a bearing on the yields demanded at its offering. A successful issuance may help it reduce its dependence of the IMF bailout.

The multilateral agency had envisaged the country issuing $1 billion of bonds this year with the size of the offering increasing by $1 billion in the coming two years.

Strong investor response to recent issuances by financially troubled countries Iraq and Greece, apart from Belarus, and a centennial bond issued by Argentina, can provide hope to both Tajikistan and Ukraine for similarly favorable outcomes. The latter has traditionally been an attractive destination in Eastern Europe for fixed income investors.

Comparatively affordable new issuances would indicate that the emerging markets bonds rally may still be on firm ground.

Inaccessible Markets: Which Frontier And Emerging Countries May Soon Be Tracked By More ETFs

Of the 24 countries classified as emerging markets by MSCI, there are 13 which have only a single dedicated ETF available to US investors. The list includes major markets like South Africa, which houses the sixth largest stock exchange in emerging markets and has a market cap of over $1 trillion.

The iShares MSCI South Africa ETF (EZA) – the only ETF tracking the South African market that is traded on US exchanges – tracks the MSCI South Africa Index, which is comprised of 53 constituents. There are no sector or theme-based funds tracking the market even though there are 18 indices on the local exchange, according to Bloomberg data.

The MSCI South Africa IMI Index, which has 111 constituents across various market caps could be an interesting option for an ETF with an even broader based exposure to a market which is currently underrepresented.

It’s not to say that ETFs investing in South Africa or other countries with just one dedicated fund like Chile are not attracting investor interest. Aside from the six largest Chinese ETFs out of the 31 funds focused on China (KBA) (PEK), the EZA and iShares MSCI Chile Capped ETF (ECH) are bigger than all others. They are larger than ETFs investing in Argentina (ARGT) (AGT) and Colombia (GXG) (ICOL) as well, both of which have two ETFs each tracking their markets.

In the graph above, single country ETFs like that for Turkey (TUR), Thailand (THD), and a frontier market like Vietnam (VNM) all feature among the largest funds in this segment.

Untouched corners

The MSCI country indices for Hungary and Czech Republic, both emerging markets, have done well in YTD 2017, having returned 35% and 18% respectively. However, there are not currently ETFs listed on US markets that would allow investors to partake in the strong performance of these countries.

The broad-based fund route does not help either. The most exposure one could get for these countries is 4.7% for Hungary and 2.5% for Czech Republic.

As far as frontier markets are concerned, there are only three countries with dedicated ETFs out of the 33 that MSCI classifies in that category – Argentina, Vietnam, and Nigeria.

Time for a relook?

There remains noticeable pockets in the frontier and emerging markets universe that can be turned into investment avenues.

Investor interest should not be a big hurdle, as the lone ETFs tracking some of the larger markets have had good traction and are considerably larger than a majority of funds tracking much bigger and popular markets.

The launch of the AGT in April this year made Argentina the first frontier market to have two ETFs tracking it. Its asset size growth would be of interest to fund companies looking at launching single-country funds for similar or even larger markets except for China, India, and Brazil.

Thus, it may be time to relook at the present offerings and think about deepening the number and scope of offerings for markets which have done well over the medium to long-term and can thus find traction.

Analyst Outlook: The Four Largest Telecommunications Stocks in Latin America

Moody’s outlook for the Latin American telecom industry

Mexican and Brazilian players primarily dominate the telecommunications sector in Latin America. However, experts remain bullish on the sector throughout the continent as smaller countries in the region are relatively untapped and have significant room for growth in terms of mobile and Internet penetration. Moody’s has a stable outlook for the Latin American telecom sector in 2017 as the industry continues to struggle with sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

Moody’s has a stable outlook for the Latin American telecom sector in 2017 despite the industry’s recent sluggish growth and cuts in capital investments. Moody’s forecasts EBITDA margins for the industry to decline from 35.6% in 2015 to 33% in 2018.  Marcos Schmidt, Moody’s Vice President stated, “Larger companies such as America Movil  (A2 negative), Telefonica Brasil (Ba1 negative) and Oi (Caa1 negative) will all see EBITDA minus capital spending grow at rates below the sector average, amid difficult economic conditions in Brazil, Peru and Chile, plus stiffer competition in Mexico that will slow growth and shrink margins.”

The agency also expects margins of telecom companies to decline due to cut-throat competition between operators. Mexico’s telecom space has become extremely competitive ever since new regulations were introduced in 2014. Dominant players in the country are compelled to cut prices, putting profit margins under pressure. Meanwhile, “In Brazil, companies such as Telefonica Brasil and Claro that focus on the postpaid market will be more resilient than Oi and TIM, which concentrate more on Brazil’s quickly shrinking prepaid market,” Schmidt says

The four largest telecom markets in Latin America are currently Brazil, Mexico, Argentina and Chile.

Brazil

Brazil is the largest telecom market in Latin America and the fifth largest globally. The telecommunications sector contributed nearly 4% to Brazil’s GDP last year while users of mobile services grew from 41 million last year to 80.6 million in August 2017. Currently, mobile internet in the form of 3G and 4G is accessible to 98.4% of the country’s population according to Telebrasil, Brazilian Telecommunications Association.

The Brazilian telecom market is primarily dominated by four large players – Spain’s Telefónica, Mexico’s América Móvil (AMX),  and Oi, controlled by Brazilian investors and Portugal and GVT.

In the last twelve months, the telecom market in Brazil has grown by 5.9% and is dominated by America Movil, Telefonica and Oi. The market leader America Movil added nearly 200,000 connections in the past one year, occupying 31% market share, while Telefonica and Oi command 27% and 23% of the market.

Spain’s Telefonica operates in Brazil as Telefónica Brasil and has branded its landline and mobile offering under Vivo. Mexico based América Móvil group operates as mobile operator Claro and cable TV services provider Net Servicos. Oi offers landline and mobile services under the Oi brand name. GVT is the country’s most successful alternative network provider, offering landline services only.

Mexico

Mexico is the second largest telecom market in Latin America with 89 million users, representing nearly 70% of the population. The telecom sector contributes nearly 3.5% to the country’s GDP.

The local market is owned by three major players. América Móvil’s Telcel has 67% of mobile connections, while Telefónica-owned Movistar has 24%, and AT&T, after acquiring Iusacell and Nextel in early 2015, occupies 9% of the market. Since 2010, mobile operator market shares have remained largely unchanged in the country.

Argentina

Argentina is of the most developed broadband markets in South America, second only to Chile. The telecom market in Argentina is primarily dominated by Telecom Argentina, Movistar, Claro, and Telecom Personal.  The local fixed-line industry is dominated Telecom Argentina (Telecom) and Telefonica de Argentina (TA) while the broadband market is occupied by Telefonica de Argentina, Telecom Argentina, and Grupo Clarin.

Chile

Chile’s broadband penetration is relatively high compared with other Latin American countries. In the past decade, Chile has benefited from solid GDP growth as larger Latin American economies have faltered. Currently, the country has one of the highest GDP per capita income, leading to high disposable income for telecom services.

Telefónica’s Movistar, Almendral’s Entel, and América Móvil’s Claro are the largest players in Chile, operating through Nextel Chile and VTR.

Telecom stocks to consider

Year to date, the MSCI World Telecom Index has surged 0.5%. Comparatively, the MSCI Brazil Telecom Index, MSCI Mexico Telecom Index, MSCI Argentina Telecom Index and the MSCI Emerging Markets Telecom Index have returned 23.5%, 48.2%,71% and 15.1% respectively.

Looking at ETFs, the iShares Latin America 40 ETF (ILF) invests 4.9% of its portfolio in Latin American telecom stocks while the iShares Global Telecom ETF (IXP) provides 2% exposure to Latin America telecom stocks. YTD, shares of these ETFs have returned 25.6% and 3.7% respectively.

The largest Latin American telecom stocks by market capitalization are America Movil, Telefonica Brasil, Tim Participacoes Sa, Telecom Argentina and Nortel Inversora.

Year to date, shares of these companies have returned 27.5%, 11.6%, 45.72%, 84.58% and 56.7% respectively.

The largest Latin American telecom providers by revenue are America Movil , Telefonica Brasil , Oi SA, Tim Participacoes SA, and Telecom Argentina S.A. In 2016, these companies generated revenues of $52.3 billion, $12.3 billion, $7.5 billion, $4.5 billion and $3.6 billion respectively.

America Movil

America Movil (MV9.F)(AMOV)(AMXL.MX) is the fourth largest mobile network provider in the world and a Forbes Global 2000 company. Controlled by Mexican billionaire Carlos Slim, it provides 363.5 million access lines, including 280.6 million mobile subscribers worldwide.

In Mexico, its subsidiary Telcel is the largest mobile operator commanding a market share in excess of 70%. The company operates in Jamaica, the Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Peru, Argentina, Uruguay, Chile, Paraguay, Puerto Rico, Colombia and Ecuador through its Claro subsidiary while in Brazil it operates through Embratel and Claro. In the United States, it operates through its subsidiary TracFone. It is among the largest telecom providers in the United States. The company also own 30% of KPN, the Netherlands based telecom company and 60% of Telekom Austria Group. In 2007, America Movil acquired Jamaican telecom company Oceanic Digital. América Móvil acquired 100% of Jamaican mobile operator Oceanic Digital, under the brand name MiPhone in August 2007. On November 15, 2005, the company signed an international pact with Bridge Alliance to jointly deliver various international services.

America Movil is the largest Mexican company by revenues with annual sales of $52.3 billion in 2016. In 2016, the company owned assets of $73 billion, making it the largest company in Mexico by assets.

The company trades on the Mexican, New York and Frankfurt stock exchanges (MV9.F)(AMOV)(AMXL.MX). With a market value of over $63 billion, the company is currently the most valuable company in Mexico, more than the next three most valuable companies combined.

Telefonica Brasil

Telefonica Brasil (VIV)(VIVT3S.SA) is the Brazilian subsidiary of the Spanish telecom giant Telefónica. The company entered Brazil in 1998 while privatization of state owned Brazilian telecom company Telebras was taking place. Telefónica began their operations in Brazil under the brand Vivo in 2003 through a joint venture with Portugal Telecom. In 2015, Telefónica Brasil acquired GVT to become the largest telecom operator in Brazil.

As at June 2017, Telefonica served nearly 97.6 million customers in Brazil. The company generated revenues of $12.3 billion in 2016, pitting it against the largest global telecom players.

Oi SA

Oi (OIBR4.SA)(OIBR-C) is Brazil’s leading telecommunications service provider, and is one of the largest telecom companies in South America in terms of subscribers and revenues. The company operates through its subsidiaries Telemar and Brasil Telecom.

In June 2016, the company filed for a $19 billion bankruptcy protection, the largest so far in Brazil. The in-court reorganization has been slowed by ongoing disputes between creditors and shareholders.

In 2016, the company serviced 63.6 million customers and generated $1.1 billion in revenues. The company trades on the Brazilian and New York stock exchanges and has gained 59% in 2017 so far.

Tim Participacoes SA

Tim Brasil is the Brazilian arm of Italy based telecom provider Telecom Italia Mobile (TI). The company has nearly 61.3 million customers in Brazil and is the first mobile company to service all states in the country.

In the last twelve months, TIM was the fastest growing broadband operator in the country growing its subscriber base by 21% to 378,446. TIM is the fifth largest broadband player in Brazil with a market share of 1%. In 2016, Tim generated revenues of $8.8 billion, third highest among Latin American telecom companies.

Shares of the company are listed on BM&F Bovespa (TIMP3.SA) and NYSE exchanges (TSU) and have gained 46% in 2017 so far.

Analysts opinion

Analysts are wary of telecom companies in Latin America’s largest economies – Brazil and Mexico – as they struggle with political and economic uncertainty.

Recently, BTIG initiated coverage on Latin America’s largest telecom company America Movil with a neutral rating raising doubts in its ability to manage its shareholder’s returns along with its massive debt burden. However, the research house is bullish on Telefonica Brasil.

Analyst Walter Piecyk mentioned in a note to investors, “The bankruptcy filing of Oi closes another chapter in the development of the wireless market in Brazil and could mark a turning point for the industry. Investors have shown little interest in the Brazilian wireless industry in recent years given the economic and political turmoil combined with the inability of the wireless industry to consolidate … Telefonica Brasil, which uses the Vivo brand in Brasil, remains the safest way to play Brasil telecoms given its diversified business, synergy opportunity and strong management team. Its stock has materially outperformed TIM Brasil, resulting in what now might be an unwarranted valuation premium …

America Movil’s total enterprise Value is slightly over 5x our 2017 EBITDA estimate in a year that we expect no growth. The stock price also implies a free cash flow yield of 7%, but primarily because of the more than 20% cut in capital investment expected this year, which we believe could have longer term negative implications for revenue growth potential. America Movil sometimes issues special dividends, but given the lack of free cash flow growth at the company and share repurchase we estimate a dividend yield of less than 3%this year and next,” the note continued.

Shares of America Movil have received 4 buy ratings, 2 sell ratings and 11 hold ratings. In comparison, Telefonica Brasil has received 13 buy ratings and merely 4 hold ratings. Telefonica Brasil has received no sell ratings. TIM has received 4 buy ratings, 2 sell ratings and 11 hold ratings. Analysts are most bearish on shares of Oi after the company filed for bankruptcy protection last year. The company has received 2 hold ratings and 3 sell ratings.

Valuations within the Latam telecom sector are stretched with average one-year forward PE ratio of 23x.

Nortel Inversora (NTL)(NORT6.BA), Cnt Telefonica Del Sur (TELSUR.CI) and Telecom Argentina (TEO) are the most attractively priced telecom stocks based on their cheap valuations. These stocks have one year forward PEs of 3.4x, 7.4x and 17x, and are trading at the steepest discount to their peers. Meanwhile Almendral Sa, Empresa Nacional De Telecom (ICA) and Atom Participacoes (ATOM3.SA) are expensive stocks.

There Are Only Three Country-Specific Frontier Market ETFs, Here Are Their Correlations To FRN

The run-up that emerging and frontier markets have witnessed in YTD 2017 has given rise to worries that rally may be coming to a close.

Though such an assessment may merit attention when referring to the broader asset class, there are specific markets which still offer an attractive investment opportunity when looking at fundamentals.

Apart from low valuations, a compelling macroeconomic story, or both, investing in country-specific ETFs apart from broad-based funds can provide another benefit: that of diversification.

Correlation matrix

The table below presents a correlation matrix between the following ETFs:

  • Guggenheim Frontier Markets ETF (FRN)
  • Global X MSCI Nigeria ETF (NGE)
  • Global X MSCI Argentina ETF (ARGT)
  • VanEck Vectors Vietnam ETF (VNM)

While the FRN represents a broad-based fund investing across the frontier markets universe, the three country-specific ETFs are the only country-focused frontier market ETFs which are traded on US exchanges.

The matrix was created based on returns data for the past three years.

For statistical significance, the p-test was applied to the data and the relationship between the returns of all four funds among themselves was found to be significant. This means that it is reasonable to assume that their performance is unlikely to be mere chance.

Among these three country-specific frontier markets funds, the NGE has the lowest positive correlation with the FRN while the ARGT has the highest.

What this means is that in periods when frontier markets equities as an asset class are doing well, adding ARGT to one’s portfolio reduces diversification benefits, which would become crucial in the case of a correction.

Thus, among the three funds, the NGE looks to be the best bet for diversification. This is subject to a favorable view on Nigerian equities, though.

In the next article, let’s dig deeper and see how the three country-specific ETFs are related in terms of correlation and which combination provides the best benefits of diversification.

Correlation Amongst Country-Focused Frontier Markets ETFs

Though emerging markets have started gaining prominence in equity portfolios – especially this year due to their performance – frontier markets are still considered a bridge too far by many.

If an investor were to allocate equity exposure across home, emerging and frontier markets via the largest ETFs tracking these markets in the proportion of their total assets sizes, the following graph would be the result.

Even if the decision of allocation were made only between emerging and frontier markets based on the proportion of asset sizes of the largest ETFs tracking these markets (EEM and FRN), the latter would form only 1% of the exposure.

However, if one was particularly bullish on frontier markets, which combination of funds would provide the best diversification?

Diversification benefits

There are three broad-based ETFs available for investing in frontier markets, listed on the basis of their asset size from largest to smallest:

  • iShares MSCI Frontier 100 ETF (FM)
  • Guggenheim Frontier Markets ETF (FRN)
  • Global X Next Emerging & Frontier ETF (EMFM)

In the previous article of this series, we had looked at the diversification relationship between country-specific frontier markets ETFs, Global X MSCI Nigeria ETF (NGE), Global X MSCI Argentina ETF (ARGT) and VanEck Vectors Vietnam ETF (VNM) and the FRN. These are the only three exchange traded funds traded on US exchanges which are dedicated to specific countries.

But what is the relationship between these three as relates to diversification?

Correlation matrix analysis

The table below displays the correlation coefficient between combinations of two of the aforementioned three country-specific funds.

The matrix was created based on returns data for the past three years.

For statistical significance, the p-test was applied to the data and the relationship between the returns of all four funds among themselves was found to be significant. This means that there is a substantial possibility that their performance has less to do with mere chance.

The table shows that the lowest positive correlation is between VNM and NGE closely followed by ARGT and NGE. On the other hand, ARGT and VNM have a much higher degree of correlation between their returns.

Diversification benefits are highest when the correlation between asset classes or instruments being compared is negative and they increase as the coefficient moves closer to its maximum value of -1.

However, since negative correlation between instruments is hard to find, low positive correlation provides the best way for portfolio diversification.

However, it is important to note that this is subject to a positive view on the instruments in question. For instance, at this juncture, Vietnamese equities may be an interesting proposition, and if one has a positive view on Nigerian equities as well, the VNM and NGE combined may not only be a good addition to a portfolio but also a good diversifier.

In such a scenario, if a portfolio already carries exposure to one of the three broad-based frontier market ETFs listed above, then adding ARGT would not result in efficient diversification.

Losing Ground: Waning Net Inflows Show Interest In Argentine Equities Is Receding

Argentine equities have been among the leaders in returns within the frontier markets universe in YTD 2017. The Global X MSCI Argentina ETF (ARGT) – one of two funds traded on US exchanges which provide exposure to Argentine equities – has risen 24% this year until August 7.

The fund has been powered by the information technology sector which has contributed to a little less than half of the ETF’s total returns. The primary driver of the sector’s performance has been a company named Mercadolibre, Inc. (MELI).

Financials are a distant second to information technology in terms of positive contribution to the fund and have been led by Grupo Financiero Galicia S.A. (GGAL) and Banco Macro S.A. (BMA).

Investor interest can also be gauged from the graph below.

It plots the outstanding shares of the ARGT and the flows witnessed by the fund in YTD 2017. Looking more closely, it also reveals a recent trend whereby investors may be losing interest in Argentine equities.

Losing ground?

The performance of the fund and its shares outstanding have seen a clear rise since the end of last year, as shown by the graph. But both have dipped noticeably from their peaks earlier this year.

Until August 7 this year, the returns of the ARGT had reached their peak at 35% in mid-May, and they were above the 30% mark as recently as mid-July.

Meanwhile, though net inflows to the fund at $36.6 million for the year are sizable for a frontier market, just a month ago, they had stood at $66.5 million, according to Bloomberg data. The fund saw massive outflows in the latter half of July, resulting in the sharp reduction in the size of net inflows. Outstanding shares of the fund have also dipped concurrently.

Why the decline and will the impact continue?

The primary reason for the decline, which is expected to continue impacting Argentine equities in the short-term, is political uncertainty.

President Mauricio Macri’s economic reforms have received a positive response from the investment community, but local residents have been furious due to tough decisions on reduction in subsidies, which have made life difficult.

The situation for Macri has been exacerbated by former President Cristina Fernandez de Kirchner’s decision to run for a Senate seat in the upcoming mid-term elections in October. The country had primary elections on August 13th, the outcome of which could provide a peek into the electorate’s mindset regarding a possible outcome later in the year.

Worries over Kirchner’s comeback, under whose regime Argentina was a closed economy, has spooked investors, and its impact can be seen on the Argentine peso plotted in the graph above. The currency has weakened considerably against the US dollar since mid-June.

Apart from indicating weakening investment sentiment, the declining peso has had an adverse impact on equity investors in the country from the US as a strong dollar has decreased their returns.

If Kirchner wins a Senate seat in October, it will put her in the running for President in the 2019 elections and could stall Macri’s reforms – a development which would hurt investment into the country.

However, a win for Macri would have the opposite effect and when coupled with MSCI’s decision not to upgrade the country to the status of an emerging market, could provide investors a buying opportunity in the interim in which markets can be expected to remain volatile.

Latin American Bonds: Why High Yields In Brazil Are Failing to Stoke Interest

Two markets stand out when searching for yields in Latin America: Brazil and Argentina. However, unlike other countries from Asia and Eastern Europe that we’ve analyzed in earlier parts of this series, the high yields on Brazilian and Argentine bonds may not be attractive enough for investors by some standards.

The graph below plots yields on 10-year bonds from Brazil and Mexico. The former should be stoking much higher investor interest than the latter due to returns offered. However, that’s not the case.

Mexico remains in play

Bloomberg recently reported the views of several major Wall Street firms on Mexican bonds. Goldman Sachs was said to have reduced exposure to emerging markets, though it remains overweight on Mexico. Further, despite the fact that Citigroup thinks emerging market credit is “fully valued,” it continues to be overweight on Mexico. Morgan Stanley has similar views and is positive on dollar-denominated sovereign bonds from the country.

Corruption, politics, and monetary policy hurting Brazilian bonds

Macro-economically, 2017 was supposed to be the turnaround year for Brazil. However, the best performing equity emerging market of 2016 has found itself bogged down by corruption scandals which has given rise to a heightened perception of political risk.

President Michel Temer himself is facing graft charges and there’s concern of another head of government having to undergo impeachment after former president Dilma Rousseff was impeached barely a year ago. Apart from elevated risk, this could also potentially throw the reform cycle out of gear – an unsavory development for investors.

Meanwhile, Luiz Inácio Lula da Silva, also a former president, was recently sentenced to nine-and-a-half years of prison on corruption charges.

Another reason why Brazil is currently suffering from a lack of appeal is due to monetary policy. There are views that the interest rate reduction cycle will stop this year. This could lead to little room for compression of yield spreads with similar maturity US Treasuries, which would mean less scope for further profits for those who had invested in Brazilian bonds at high yields.

The Brazilian real (BRL) has been almost unchanged in YTD 2017. Weakening of the currency could make local currency denominated bonds attractive, though the political risk factor can be expected to outweigh this. On the other hand, if Mexico’s central bank cuts rates, it would weaken the peso. Given investor affinity towards the country bonds already in place, their appeal could heighten even more.

So far, we have yet to address Argentine bonds. The local currency (ARS) is part of the reason, as shown from the graph above displaying the sharp weakness experienced by the Argentine peso, thus making local currency bonds unattractive.

But there’s another reason which applies to the broader emerging markets universe as well. Let’s look at this in the next article of the series.

Why Markets Still Can’t Wrap Their Head Around Argentina’s 100-Year Bond Sale

On June 20, MSCI decided not to include Argentina in its widely-tracked Emerging Markets Index – an aspect outlined amidst the broader framework of stock market performance in the previous article.

But a day earlier, the country did something arguably much more drastic: it issued a 100-year bond. And markets are still talking about its reasoning and implications.

The issuance made it only the second country in Latin America – after Mexico in 2010 – to go so long in duration.

There are major differences between the two though with a prominent one being sovereign ratings. Though Argentina was upgraded by S&P Global Ratings to B from B- in April this year, it is seven notches lower the Mexico, which is rated as BBB+.

The $2.75 billion bond, which will mature in 2117, had an exceptionally strong order book of $9.75 billion. The coupon set was 7.125% with the yield a shade under 8%.

Markets were intrigued by the issuance, to say the least, with several questioning the ability of the country to payback its debt given its torrid history of defaults.

A brief background

Since independence in 1816, Argentina has defaulted on its debt eight times with five instances taking place in the past century.

Its most spectacular default in recent memory was at the turn of the millennium in 2001 when it couldn’t payback $95 billion in debt – a record at that point. Holders of those bonds had received about 30 cents on every dollar of debt they had held.

More recently, it had high profile disagreements on bond payments to hedge fund Elliott Management – an issue that was settled in 2016.

Irrational exuberance?

Several market participants have pointed out that for a country which was locked out of financial markets since an economic collapse in 2001 through April 2016, to find an appetite for a century bond is bereft of rationality.

As far as investors are concerned, the prime interest was the high yields being offered by the bond in a yield-starved world. Investors have piled in on emerging market debt as these bonds have far outperformed their US counterparts, and locking in a 7.9% yield at this time was an extremely attractive proposition.

For Argentina, given its economic state and reputation, the yields were not all that high, making it a win-win for both the country as well as its investors.

But what about the risks?

Argentina had some room for a bond issuance as its debt, at 54% of gross domestic product (GDP), is still lower than Brazil and Mexico.

What needs to be monitored, though, is the duration for which the country will continue to finance its deficit via this mode, coupled with the size of issuance in foreign currency.

Argentina has already increased its overall foreign currency bond issuance target for the year to $12.75 billion from an estimated $7 million earlier. The 100-year issuance places current outstanding foreign currency bond issuance at $10.2 billion, leaving room for $2.6 billion in euro or Swiss franc issuance during the rest of the year.

Cashing in on investor hunger for yield may seem opportunistic, but if used appropriately, it can help Argentina get back on its feet and make the bonds valuable for existing investors as the economy bounces back, supported by economic policies.

There is a slight concerns with this strategy, though. Let’s look at that in the next article.