On September 12, Argentina will go to the polls for this year’s open primaries to determine the final candidates for the November elections. 

Polls suggest a very tight result between the ruling-party candidate, Tolosa Paz, and the opposition candidate, Diego Santilli. 

We don’t believe that a ruling party victory would affect bonds much, as they are trading at very low levels. An opposition victory, on the other hand, would be bullish. 

The Buenos Aires Province reached an agreement with creditors ending a 16-month dispute. 

The exchange will have a recovery value of 49.2 for the A series, 41 for the B and 38.7 for the C at a 17% exit yield. 

Settlement is expected for September 3.  

The monetary base has grown 17.5% YoY, putting even more pressure on the already high inflation rate (51.7% YoY up to July). 

The government has been unwilling to cut subsidies to narrow its fiscal deficit, and we believe any policy change will have to wait until after the elections. 

Currency depreciation is the other major factor pushing inflation up. 

We update our macro forecasts and now expect an official depreciation of 27.4% in 2021, alongside a 49.3% inflation rate. 

BUY: Argentina received the USD 4.35 bn SDR disbursement from the IMF, which will boost liquidity in the short-term. Macro ...

Argentina offers an arbitrage trade between local and foreign market bonds.

The bonds also serve as an important role in the regulation of the FX market, reducing potential risk.

In our report “Just Ignore It Comes from Argentina” we argued that Argentinian corporative bonds at times offer attractive returns.

Now,  we broaden our focus to include other Argentina-based corporate issuers, as YPF and Pampa Energía.

We also include Petrobras and Petróleos Mexicanos as a way to compare.

Buenos Aires Province made a new offer, but for now, it is unclear the level of acceptance.

The fiscal deficit narrowed to 0.7% of GDP between January and May, from 3.3% in the same period of 2020.

The narrowing of the fiscal deficit was partly due to the increase in soybean prices and other commodities and the fact that some of the COVID-19 funds remain unused.

Export duties were the main driver behind the increase in tax collection during Jan-May 2021, mainly thanks to the rise of soybean prices and the recovery in exports.

EMFI Analytics expects a fiscal deficit of 3.8% of GDP in 2021, from 8.5% in 2020.

There are downside risks to our forecast, as the government could increase spending on social protec...

The Province of Buenos Aires (PBA) updated its offer to creditors.

Creditors replied with two new offers, but the province didn't accept and refused to make further concessions.

The massive pandemic-related liquidity injection started to push prices up in January, with inflation reaching 48.8% YoY in May.

Fernández’ administration has tried to control inflation through price controls and meat export bans.

Price controls have proved to be an ineffective tool, as inflation has accelerated this year for both regulated and unregulated products.

We expect inflation to end the year at 48.9%, as our base case scenario is that a tighter monetary policy will ease inflationary pressures during the H2-2021.

However, if the government increases fiscal spending as the legislative elections ...

International tailwinds favor Argentina and have allowed the central bank to achieve some relative stability in the exchange rate. 

We look into carry trades involving hard currency domestic bonds and inflation-linked bonds (BONCER). 

Over the last 6 months, BONCER 23 greatly outperformed the hard currency curves, posting a USD return of 15.2% thanks to a strong inflation adjustment on capital and relative stability in the exchange rate. 

Going forward, we expect high inflation and a relatively stable exchange rate in the l...

At just 10.8% of GDP, Argentina has a low tax ratio compared to other Latin American countries.

Tax revenues increased in 2020 despite the GDP drop thanks to the withdrawal of the 2017 tax reform.

However, the recovery in tax revenues should be temporary, as it has been achieved through a more distortive tax system.

The posterchild of distortive taxes is the newly implemented PAIS FX tax, which just generated 0.5% of GDP in 2020, and is already decreasing in real terms and as a share of GDP in 2021.

Fiscal data has been better than expected thanks to the recovery in commodity prices.

An opposition victory is n...

Pan American Energy issued a 9.125% coupon bond.

The company has strong fundamentals and offers an attractive yield in the actual context of low returns.

Mid-term elections are scheduled for November 14. Half of the seats in the lower house and a third of those in the Senate will be on dispute.

The ruling party currently has 46% of the Deputies and 57% of the Senators, but polling figures suggest that the opposition could outperform them this time around.

Results in the Buenos Aires Province will be in the spotlight, as losing in the mid-term elections usually precedes a loss in the presidential elections two years later.

BUY: We continue to like the optionality in ARGENT due to the limited downside at cheap valuations but regard the credit as a long-term play.

We emphasize three of the most relevant sub-sovereign issuers: the Buenos Aires province, the Autonomous City of Buenos Aires (CABA), and Mendoza.

HOLD: We consider Buenos Aires Province as a HOLD due to low cash prices relative to our expectation of recovery values.

BUY: We consider MENDOZ 29 as a BUY since the bond offers a high return despite strong fundamentals.

BUY: Compared with other provincial bonds mentioned above, BUEAIR 27 provides a higher yield than our assessment of the implicit risk.

The BCRA started financing the Treasury again in March through transitory overdrafts, after showing some restraint in Q4-2020.

Gross reserves have barely increased even though the BCRA has bought USD 3,028 mn in the FX market in the last four months.

The evolution of reserves is contingent on the debt negotiations with the Paris Club and the IMF.

Argentina will likely receive USD 4,355 mn at the end of August in a new SDR allocation, which will allow it to replenish international reserves and buy time for an agreement with the IMF and Paris Club.

BUY: The bond´s step-up coupon structure and the low debt servic...

The IMF expects Argentina to grow 5.8% this year, according to the latest WEO.

Vice-president Cristina Fernández said that a new default is not an option, even if she also added that repayment to the IMF under current terms is not possible.

The country is in the midst of a second COVID-19 wave.

The large spread between the parallel and the official FX rates eroded the trade surplus in 2020.

But it appears that Argentina lucked out, as commodity prices have shot up in Q1-2021.

The export recovery has given the Central Bank space to purchase dollars in the official market and replenish international reserves.

Looks like Fernández’ administration just found its ticket to arrive at the midterm legislative elections without a major FX crisis.

BUY: There are tangible catalysts (IMF, mid-terms) as 2021 progresses, and even though the market continues to be pessimistic on its expectations, we like the...

Rising agricultural commodity prices and the possible expected issuance of SDR has given the Fernandez administration a lucky break. 

FX Inflows have allowed the Central Bank to slow down the USDARS crawling peg rate. 

We look at how a stronger currency can improve fiscal deficit figures by lowering servicing costs of USD-linked securities. 

The mix of extremely low bond cash prices and tangible catalysts provide a good risk/reward setting with attractive optionality.

As bonds continue to slide, our thesis is reinforced, turning us even more bullish.

We stress test our thesis, by assuming that the next government – to be elected in late 2023 – restructures its commercial debt.

We analyse bond’s break-even recovery values. This is the recovery value that will give investors flat returns after facing a hypothetical restructuring.

Central Bank (BCRA) debt issuances are becoming an important source of monetary expansion.

In 2021, the BCRA will have to issue 41% of January’s monetary base (USD 11,981 mn) to pay interest on its monetary liabilities.

In January, net international reserves hit a new low, reaching just USD 3,667 mn, 69% lower than when Fernández started his mandate.

EMFI Securities expects inflation to climb to 48.9% this year (from 36% in 2020), at the expense of regulated prices, a higher spread between the official and parallel FX rate, repressed salaries and social security adjustments.

BUY: Despite poor signals fr...

We revised our Argentina Local Currency December strategy outlook, where we analyzed inflation linked and dollar linked bonds. 

ARS Inflation Linkers continue to be the only attractive securities to invest within the local currency universe. 

Inflation heated up in December, with a 4% m-o-m print (core CPI 4.9%) and we expect a 4.5% m-o-m print for January 

Given Central Bank signalling, we like the belly and the long-end, and especially like TC25 and DICP, which offer 8.5% and 7.29% real yields. 

The market is pricing a strong likelihood that Argentina will renegotiate the bonds again, possibly as soon as in 2024.

We computed the hypothetical returns if there is a renegotiation before the July 2024 payment date, and find ARGENT 41 as the most attractive option to play the scenario.

For a recovery value of 40%, an investor would earn an 8.6% return per year. The position would still be profitable for recovery values as low as 28.9%.

We also show bond sensibilities to yield curve movements, and find that ARGENT 30 maximizes exposure to yield compression over a 1-year holding period.

Overall, we favor ARGENT 41...

A creditor committee formed by Argentine sub-sovereign bondholders filed a claim in the United States District Court for the Southern District of New York seeking a judgment against Entre Rios 

ENTRIO 25 continues to trade in the 55c-60c range, regardless of the aforementioned suit or the lack of guidance given by the province on debt restructuring. 

We think that, considering its fiscal position, Entre Rios can offer a higher step-up coupon structure and the resulting recovery values of its new 2031 bond.

We remain positive that despite negotiations stalling, ENTRIO 25 trading at 58 is one of the best opportuni...

ARGENT and ECUA bonds have faced a rough patch, but only ARGENT seems to have touched rock bottom.

Caution is the path to follow with both curves, but ECUA has a lot more ground to lose in case of setbacks.

ECUA prices reflect uncertainty over the upcoming presidential elections, but a victory from Correísmo in the first round could push them further down.

ARGENT bonds face a myriad of challenges, but a low cash price and yields exceeding 15% more than compensate the risks

Negotiations with the IMF, the economic recovery, and Legislative elections will mark the course of Argentina’s performance in 2021.

Legislative Elections will be polarized between Frente de Todos and Juntos por el Cambio, with Frente de Todos holding a small lead.

Argentina will face gross financing needs of USD 56,884 mn (or 14.3% of GDP) this year; a big chunk of which comes from the service of local law debt.

HOLD: Expectations of an upcoming agreement with the IMF have deteriorated and sustainability indicators continue to deteriorate. Despite this, Argentina between 33 and 41 cents remains an attractive risk/r...

Emerging markets faced massive capital flight as a result of the COVID-19 crisis.

However, there has been debate as to whether the severe initial shock was primarily the result of an interruption in liquidity flows and not the deterioration of macroeconomic variables.

Growth in emerging economies may have taken a permanent hit but, at the same time, emerging markets could become more attractive to those hunting for yield.

We believe that the deepness of the impact of the pandemic on EMs can be quantified.

With 2021 just around the corner, only Neuquén, Mendoza, and Chubut have come to terms with their creditors. 

Santa Fe and Ciudad Autonoma de Buenos Aires (the municipality, not the province) managed to service their debt and scare the ghost of default away thanks to their low leverage and resilient fiscal balance. 

We looked at IMF guidelines in order to pinpoint a theoretical sustainable coupon level for the provinces that have not yet completed their restructurings 

Entre Rios and Rio Negro should be able to improve their offer, and would manage to close their restructuring closer to an NPV of 85&...

The primary fiscal gap continued widening during October, reaching 5.3% of GDP YTD, which is already the worst result since 2008.

Compared to our forecast, the 2021 budget is quite optimistic, as it underestimates expenditures and overestimates revenues.

EMFI Securities expects the primary deficit to reach 5.6% of GDP in 2021, while the overall fiscal gap will amount to 7.1% of GDP.

The low levels of monetization in early-2020 provided the way for increasing the money supply without a considerable inflationary impact.

BUY: With the expectation of an upcoming agreement with the IMF, Argentina trading between 30 and 4...

We analyze inflation linked bonds (CER Bonds) and the synthetic position constructed by combining dollar linked bonds and local non-delivery USDARS forwards.

The market (seen in the bond market breakeven inflation) is expecting that inflation will accelerate as lockdown measures start to ease and the money printing from Q1 and Q2 start to kick in.  

From the linker curve we like the short end and the belly of the curve, as we believe that a more hawkish stance from the central bank can undermine the returns of the longer duration bonds.

We like the synthetic that can be built by buy...

We take a comprehensive look at political risk indicators in a group of Emerging Market countries, trying to identify potential sources of conflict.

We analyze the electoral scenarios in the four Latin American nations that will have electoral processes during the end of 2020 and all of 2021.

We review the scenarios in the parliamentarians of Argentina and El Salvador, we comment on the electoral process that will take place in Venezuela, and we review the perspectives of the presidential elections in Ecuador.

We evaluated the World Bank’s governance indicators for our sample countries in 2019 and share our view of thes...

Inflation picked up in October after prices increased 3.8% MoM (from 2.2% on average until September), reaching an increase of 35.7% in YoY terms.

The increase in interest rates forms part of a set of measures that the government is taking to signal a more orthodox policy path.

We believe that it would be very challenging to pursue this set of measures since the government lacks political cohesion within the Peronist coalition to carry on with these policies.

BUY: We continue to believe that Argentina trading in the mid 30’s presents an attractive risk/reward, and we maintain our BUY for the credit

Scholarly research shows that domestic debt grew as a share of total debt in EMs during the first decade of the century, but defaults on domestic creditors still decreased significantly.

A default to domestic investors usually carries a higher political and economic cost than a default to foreign investors.

Domestic debt is usually concentrated in local financial institutions, such as banks, insurance companies and pension funds.

The primary fiscal deficit has reached record highs of 4.9% of GDP YTD, beating the record set during the first year of Macri’s administration in 2016.

The Central Bank financed the government by 6.8% of GDP, of which by 4.7% are in profit transfers and 2.1% through transitory overdrafts.

Monetary financing will cover 60% of the fiscal deficit in 2021 (-4.5% of GDP), and domestic debt will fill the rest.

The broad money will grow 55% by the end of 2021, which will result in inflation acceleration.

We continue to believe that Argentina trading in the 30 presents an interesting asymmetry, and we maintain our BUY...

Both Argentina and Ecuador have been underperforming after their restructuring, with Argentina suffering significantly more.

At this point, given the significant increase in the spread between both curves, we still think both credits are cheap, but find Argentina more attractive. 

In our view negative factors in Argentina such as a problematic official devaluation, inflation, increased strain on skinny reserve buffers are all already discounted in current prices.

On Argentina, we think much of the pessimist expectations on the Fernández administration’s policy-making are already priced in, leaving room f...

The strategy (or the lack of) for Argentina is to clench its teeth and hold until a new deal is struck with the IMF.

The main goal of Argentine authorities is to postpone the repayments of the USD 44 bn loan with the IMF.

The IMF will ask for a relaxation of capital controls and a normalization of the FX market, coupled with rules on monetary financing once the country leaves the worst part of the pandemic behind.

We believe that the Fund will allow for fiscal deficits in 2021 and a gradual convergence to a balanced budget in 2022/2023.

We upgrade Argentina to  BUY, and like the  New 35’s f...

With the restructuring operations in Argentina and Ecuador having finally settled, we look into the new bonds in search of attractive investment opportunities.

Low coupons in relation to yields result in very low cash prices, which makes both sets of bonds attractive versus other comparable sovereign bonds.

There is a distinct lack of carry, but it is offset by a very strong pull-to-par effect, which means that bond prices can rise very quickly.

In Ecuador, we find a very compelling combination of high potential returns if yields compress and limited downside if they deteriorate, which makes the credit a strong BUY f...

During the 1Q20, the economy fell sharply by 5.4%, from 1.1% YoY in the 4Q19.

The government partially relaxed social distancing measures in mid-June, which caused a slowdown in the decline of the economic activity index to 12% YoY in June (from -26% in April).

However, the levels of economic activity are still below pre-lockdown levels.

The COVID-19 pandemic started as a supply-side shock, but it could quickly evolve into a demand shortfall if high levels of uncertainty remain.

The primary fiscal deficit reached 2.6% of GDP during Jan-May 2020, close to the 3% previously forecasted by the government for the whole year

The Central Bank has provided 4.7% of GDP in financing to the government in the year to July, of which 1.7% corresponds to transitory overdrafts and 3% to utility transfers.

The primary fiscal deficit will soar from 3% of GDP in the first budget to 6.3% if the extension of the 2020 fiscal budget is approved by Parliament.

We initiate our coverage of the Argentine provinces, which as the sovereign, are poised to restructure its debt,

Between 2016 and 2018, Argentine provinces took advantage of the market openness and issued USD 12.3 bn in hard currency bonds.

Understanding the key differences between the provinces will be decisive to know what to expect going forward.

The sovereign is going to set the tone for the following restructurings.

We think that most Provinces do require some degree of debt relief. The exceptions in our view are the City of Buenos Aires and Neuquén.

Argentina's new restructuring proposal represents a meaningul improvement when compared to previous offers in terms of NPV.

The inclusion of minimun participation thresholds is something positive in our view, as it signals the goverment's intent to go through an exchange without holdouts.

So far, from the biggest creditor groups, the Exchange Bond Holders Group and the Ad Hoc Group have rejected the offer, while the Bondholders group has expressed support.

In terms of valuation, the front end of the global curve is the only obstacle we see for a deal going through.

We remain positve on Argentina...

The process of defaulting and restructuring usually involves a sharp spike in yields just before the credit event.

Then yields lose their economic meaning and only prices make sense, as they turn into a summary of market expectations for the recovery values.

This period ends when an exchange takes place and the old bonds are replaced by new bonds with a given exit yield

One year after the agreement, yields fall on average 4.1 pp from 12.6% to 8.5%.

This shows that there is potential to pick up price gains by entering a credit just after restructuring, and waiting for spread compression during the first year.

After months of renegotiating, debt talks between Argentina and its creditors have come to a halt.

Argentina has made important ammendments to its first offer in order to reach a deal with creditors, and bondholders have also revised their pretensions. 

If we look at the proposals from a valuation standpoint, it is hard to see this deal falling through. 

The real problem in this negotiations is the legal fine print of the proposals, which in this case has numerous angles and is becoming more complex.

One of the key barriers to a deal is the re-designation clause, which Argentina has included in its fi...

Emerging debt continues to be in trouble given current market conditions.

So far debt relief proposals by the G20, IMF and World Bank have only included private creditors on a voluntary basis.

It seems more costly to deal with relief or restructuring of Eurobonds than to advocate for this type of request in bilateral and commercial debt.

Multilateral organizations are also constrained from granting debt relief by its potential impact on their own credit profiles.

Low interest rates and the hunt for yields of the last decade has left broad swaths of EMs overindebted and vulnerable.

The first half of 2020 is not yet over and we already have 3 countries in default.

The recent record of most defaults on Eurobonds on a single year was 4 in 2017, so 2020 is not far from setting new records.

Eurobond restructuring processes are usually among the most complicated due to the variety of holders and the different interests they represent.

Suriname, Zambia, Belize, Sri Lanka and Angola are in the most risk to engross the default-statistic for the year.

We estimate that net international reserves fell 17% compared to April, standing at USD 7,538 mn on May 23.

To put this figure in context, between April and May the BCRA sold USD 1,317 mn  (17% of net reserves) in the official FX market.

Given the low levels of net reserves, it is unlikely that the BCRA will continue to be a net buyer of USD in the medium term.

The strategy of offering hedging along the forward curve complements all of the other measures taken by the government to take the pressure off the precious FX reserves.

All the necessary ingredients for a devaluation of the FX rate and an accelerat...

May was one of those months that feels like a year. We had a default in Argentina, a tense election in Suriname, a deadly pandemic still spreading around the world, and yet, it was a good month for emerging market debt

Our EMFI Core Index went up for the first time in 6 months. The biggest winners were Argentina, Angola and Ecuador, while Venezuela, Suriname and Sri Lanka were among the negative outliers that went against the general risk-on mood

The macro and fiscal situations deteriorated further for all countries covered, and we chronicled the dramatic economic crash in our Country Reports

We’ve been preparing fo...

Argentina officially entered into default after failing to service USD 503 mn of interest payments.

After having its first proposal widely rejected by bondholders, the government continues to maintain dialogue with bondholders, who presented counteroffers.

We think actual prices include high probabilities of a deal materializing in the short term.

In our view, going long Argentine bonds at current prices with only a deal in sight does not justify the risk.

An investment thesis with a longer horizon that contemplates a post-restructuring scenario could support selective long positions.

As of May 22, 8 countries have at least one USD-denominated sovereign bond trading below 50 cents on the dollar.

The Covid-19 crisis could lead to a new wave of sovereign defaults from prolonged confinements.

We discuss the worst debt restructuring events so far this century.

Argentina 2005 remains at the forefront of these events if we exclude the exceptional cases of countries at war or leaving them.

The countries with the most compromised solvencies that could generate problems with their debt are Angola and somewhat behind, Sri Lanka, El Salvador, Egypt and Pakistan.

A pandemic year was on the cards, the dramatic magnitude of its effects was not.

The global economy is expected to shrink by 3% in 2020, but leading indicators are pointing to a deeper downturn.

Emerging countries with a history of volatile economic growth will show the worst results.

Some economies may experience a period of above-trend growth during the recovery, although the level of GDP will remain, in most cases, below the pre-virus level.

Pakistan is the weakest among the EMFI Countries, in terms of the spread of the virus. Lebanon, Sri Lanka and Barbados are the strongest, with a controlled increase rate and a persistent lockdown.

The countries that we evaluate with the worst economic performance year-to-date are Angola, Venezuela, Lebanon, Barbados, El Salvador, Ecuador, Sri Lanka, Argentina and Suriname.

Since the end of 2019, the local currency has depreciated -70.5% in Venezuela, -52.4% in Lebanon, -43.5% in Argentina and -40% in Suriname.

El Salvador and Argentina launched the most ambitious fiscal program among our sample, which will cost 6% and 5.6...

The safest rung of EM hard-currency sovereign bonds fell on March but has already retraced all their losses.

Mid-quality EMs plunged over March and have risen somehow since, but haven’t fully recovered.

This segment has seen a 320 bps rise in average yield in 2020, going from an average 6.1% yield to 9.3%.

We believe high-yield bonds in our mid-quality group have significant upside if they avert a credit event.

After a dry March, markets are again open for fresh bonds, but only from relatively high-quality issuers.

Argentina extends deadline for debt restructuring deal until May 22.

Alberto Fernandez and Martin Guzmán have invited bondholders to present counteroffers and suggest ammendments.

An increase in coupons, principal haircut ammendments, and payment in the first 3 years can increase the new bonds net present values substantially.

Buenos Aires Province has missed its last debt service and has also extended its deadline for debt deal until May 26.

We expect to see the province coordinating with the sovereign, and make similar ammendments to its initial offer.

US stocks rose 12.7% in April, while US investment grade bonds rose 4.6% and EM bonds 4.0%.

Our EMFI Core Index fell 0.9% over the month and is 27.1% down YTD.

The best performers of April were Egypt (+4.7%), Sri Lanka (+4.0%) and Turkey (+3.8%).

The worst performers were Suriname (-26.9%), Lebanon (-14.0%) and El Salvador (-11.3%).

The IMF has approved just over USD 16.0 bn for 61 countries.

Of the 16 countries we follow, 6 have already been granted financing for a combined USD 3.5 bn.

Lebanon and Argentina presented restructuring proposals asking for large debt relief but not offering much adjustment.<...

The fiscal stimulus package has been fully financed with monetary issuance in March.

We may see an inflation acceleration in the second half of 2020 once the lockdown is lifted.

The spread between the FX rates soared reaching 2011-2015 highs.

The higher spread of FX rates raises expectations of a new devaluation.

We identified 23 countries that have at least one bond yielding above 10%, a threshold usually associated with sovereign distress.

Among the most distressed credits, first-time defaulter Lebanon is trading between 16.3 and 18.3 cents on the dollar, on account of slow progress on a reform plan.

Argentina’s debt goes in a range of 23.2 to 34.6 cents on the dollar, days after the Fernández administration’s aggressive mid-April proposal to bondholders was publicly rejected by 3 creditor groups.

Ecuador trades between 28.8 and 33.6, after negotiating a coupon standstill that will give the country until Augus...

Argentina, land of silver, a nation known for its beautiful landscapes, cultural riches and, of course, economic malpractice. A century of (occasionally violent) ups and downs combined with crises of all kinds has eaten away at the country’s once prosperous economy, going from having the sixth highest GDP per capita in the world at the turn of the twentieth century to getting closer with each passing day to its ninth default since achieving independence, a credit event that will be the focus of this guide.

Our objective is to provide all the essential information any investor would need to understand the current situation and p...

On April 15, the G20 agreed on a standstill for bilateral debt service during 2020. Nonetheless, the agreement only applies to IDA-eligible countries. The suspension will be NPV-neutral and will involve repayment over 4 years, including a 1-year grace period.

Multilaterals haven’t found a way to implement a similar standstill. In fact, Fitch Ratings warned them that joining in on the G20 standstill could result in rating downgrades if not appropriately compensated by shareholder countries.

On aggregate, official creditors account for almost 90% of the debt of low-income, and 60% of that of lower middle-income countries, b...