Brazil-Beating Growth Shrinks Bond Yield Gap: Argentina Credit

Argentina’s borrowing costs relative to investment-grade Latin American countries are sinking as the nation posts the region’s fastest economic growth.

The extra yield investors demand to own Argentine dollar notes instead of debt from Brazil, Peru and Mexico shrank to 395 basis points from 581 at the beginning of the year, according to JPMorgan Chase & Co.’s EMBI Global index. The gap may narrow to 250 basis points, or 2.5 percentage points, by 2012, according to RBC Capital Markets.

The central bank forecasts Argentina’s economy will grow 9 percent this year, compared with expansions of 7.3 percent in Brazil, 8 percent in Peru and 5 percent in Mexico. Argentina had a budget surplus equal to 0.2 percent of gross domestic product in the 12 months through September, according to Morgan Stanley. Brazil had a deficit of 2.6 percent and Mexico a gap of 2.4 percent. Standard & Poor’s rates Argentina B, seven steps below Mexico and six levels lower than Brazil and Peru.

“It’s going to be gradual and bumpy, but we think it’s going to converge towards the other Latin American countries,” said Eduardo Suarez, an emerging-markets strategist at RBC in Toronto. “They’re growing strongly. The public finance situation is relatively strong.”

The yield on Argentine bonds tumbled 192 basis points this year to 8.93 percent as South America’s second-biggest economy posts the fastest economic expansion in five years, according to JPMorgan. A record 55-million metric ton soybean harvest and surging automobile sales to neighboring Brazil pushed reserves to a record $52 billion this month.

‘Good or Better’

Argentina’s per-capita GDP of $9,880 last year was more than twice that of Brazil and triple that of Peru, according to the World Bank.

“Some of the indicators look as good or better than some of the other countries in the region that are investment grade or near it,” said Sebastian Briozzo, a Latin America director at S&P in Buenos Aires.

The Paris Club of creditor nations accepted Argentina’s request to hold talks on restructuring its estimated $6.7 billion of debt without the oversight of the International Monetary Fund, President Cristina Fernandez de Kirchner said yesterday. Fernandez said in a nationwide broadcast from Buenos Aires that she hopes to have the defaulted debt renegotiated by 2011.

Andreas Adriano, an IMF spokesman in Washington, said the fund doesn’t comment on Paris Club deals.

While an agreement with the Paris Club would be a “positive event,” it wouldn’t trigger a ratings increase, S&P’s Briozzo said before Fernandez’s announcement.

Inflation Outlook

Speculation that Fernandez’s government is underreporting inflation clouds the country’s economic outlook, according to Briozzo. Economists and politicians including Vice President Julio Cobos have questioned official inflation statistics since 2007, when Nestor Kirchner, Fernandez’s late husband and predecessor put a political appointee in charge of the agency that measures consumer prices. The government says its data is accurate.

The government said Nov. 12 that annual inflation held at 11.1 percent in October for the third straight month. Argentines expect consumer prices to rise 30 percent over the next 12 months, according to a poll by Buenos Aires-based Torcuato Di Tella University. The Nov. 1-10 poll of 1,210 people by Poliarquia Consultores had a margin of error of 3.5 percentage points, the university said in a statement yesterday.

“In those other countries macroeconomic stability is better anchored and it’s easier to put out a base-case scenario for the next three to four years,” S&P’s Briozzo said. “Here, in Argentina, that’s more difficult.”

‘Country Risk’

Argentina’s reluctance to work with the IMF and lawsuits from creditors who rejected the government’s offer to swap debt from its record $95 billion debt default in 2001 make the country risky for investors, said Arturo Porzecanski, an international finance professor at American University in Washington.

“A bird’s-eye view of Argentina could easily lead some to believe that Argentina has come such a long way from its troubled past that its creditworthiness might be underappreciated by the rating agencies and that its riskiness may be exaggerated by bond markets,” Porzecanski wrote in a paper he presented in Washington this month. “There is a great deal of country risk that is not captured by these indicators.”

The peso was unchanged at 3.9694 per dollar.

GDP Warrants

Five-year credit-default swaps tied to Argentine debt rose 12 basis points yesterday to 664, according to CMA. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to debt agreements.

Warrants linked to economic growth fell 0.12 cent to 13.56 cents, according to data compiled by Bloomberg.

Vitali Meschoulam, a debt strategist with Morgan Stanley in New York, forecasts the price of the warrants may rise to 16 cents by mid-February.

“In terms of performance, Argentina is still one of our top overweights,” Meschoulam said. “There is a sense in the investment community that Argentina is doing extremely well, but it’s doing so in spite of the policy mix that’s being pursued by the current government.”