Milei Overhaul Tests Argentina’s $14.3 Billion Provincial Bonds
- Weaker peso makes it more expensive for provinces to pay debt
- Cuts to tax transfers could inflate some regions’ deficits
President Javier Milei’s plan to cut funding for Argentina’s provinces is casting doubt on a trade investors saw as one of the safest in the country’s battered markets.
Milei’s team wants to reduce funds known as discretionary transfers, which are sent to states on top of the tax revenue they receive from the national government. Cutting the payments — which doesn’t require congressional approval — will add to their financial strains, with local brokerage firms warning that Buenos Aires and La Rioja will bear the brunt of the cuts.
“Both provinces have over 10% of their revenues coming from discretionary transfers,” said Santiago Resico, an economist at TPCG Valores in Buenos Aires. “So those two would be seriously compromised.”
The changes to transfers, which the government has yet to fully detail, threaten to dent the notes’ status on Wall Street. The regional bonds, worth some $14.3 billion according to data compiled by Bloomberg, are a sort of haven for money managers who want to invest in the country, but avoid the risk of carrying sovereign debt that’s been marred by a myriad of defaults.
Some Provinces May Face Brunt of Milei's Overhaul
La Rioja, Buenos Aires Province most reliant on discretionary transfers
Source: TPCG Valores
Adding to woes is another looming currency devaluation, which could cause a spike in the cost of servicing hard-currency debt. Milei devalued the peso by 54% in his first week in office, and kept a crawling peg that lets it slip by about 2% a month. But with monthly inflation exceeding 25% in December and set to remain high, analysts are expecting another devaluation soon.
Barclays and Bank of America analysts in recent weeks have suggested that monetary authorities may accelerate the pace with which they devalue the peso, which could catapult the amount of local cash provinces need to make payments on their dollar debt.
“It’s unclear at this point the path the peso will take in 2024, which raises some uncertainty about the province’s ability to repay foreign debt in dollars,” said Jared Lou, a portfolio manager at William Blair in New York.
While traders largely expect provinces to make good on their dues — Buenos Aires and La Rioja have a combined $780 million in interest and principal payments this year, according to data compiled by Bloomberg — the lack of clarity about the impact of Milei’s changes has weighed on the bonds.
After Milei took office on Dec. 10, Buenos Aires notes due in 2037 slipped below sovereign notes due in 2038 for the first time since the province issued its restructured notes three years ago, before inching ahead again at the end of last month. La Rioja’s dollar notes due in 2028, despite trading above the sovereign, have seen declines over the same period.
Little remains known about the magnitude and direction of the cuts announced in December.
Presidential spokesperson Manuel Adorni said on Jan. 29 that provincial governments may face more cuts after Milei removed tax hikes on personal income and key exports from his omnibus package in Congress designed to overhaul the economy.
A spokesperson for Buenos Aires Governor Axel Kicillof derided the cuts to the discretionary funds in a statement and said they clearly harm the province. A spokesman for La Rioja’s governor declined to comment. Both provinces are controlled by opposition Peronist governors.
Spending cuts won’t affect all of the provinces the same way, though. Regional bonds from Neuquen and Chubut are considered safer considering they’re guaranteed by oil and gas royalties and are expected to see little impact to their balance sheets if the government cuts transfers.
“Not all provinces are prepared in the same way to face the coming months,” said Javier Casabal, a strategist at Adcap Securities in Buenos Aires. “It seems that provincial bonds will be under some stress” for the time being.
Keine Kommentare:
Kommentar veröffentlichen