Higher costs await Argentine corporates as peso falls
May 15, 2018 |
Bond issuers stare down greater capital markets funding costs after the currency dipped to new lows on Monday
Argentine bond issuers are staring at higher funding costs from the capital markets as the country's peso slid to another record low on Monday.
Last week's outreach to the IMF and regional multilateral financiers may have quelled investors' immediate concerns, but Argentina's structural weaknesses have been found out amid the depreciation of the peso.
Moody's said in a report on Monday that fiscal and current account deficits, "rampant" double-digit inflation, a small financial system and a "heavy" reliance on investor flows would increase borrowing costs for Argentines.
These problems, along with higher interest rates, could also limit debt issuers' access to the international capital markets.
"Some regional and local governments may have to postpone plans to issue debt," Moody's said in the report, adding that non-financial companies were exposed to FX risk because of the increased amount of dollar-denominated debt they had accumulated.
Telecom Argentina and PCR both wrapped up investor meetings ahead of potential bond sales, but in the aftermath of the peso malaise, both halted new issue plans.
Meanwhile, Argentine utilities' financing costs were also expected to rise, but this could be offset by higher consumer prices.
Public-private partnerships (PPPs) and Argentina's power generators, however, should be shielded due to dollar-denominated contracts and legal frameworks mitigating interest rate and depreciation risks, Moody's added.
Despite the government's best efforts to intervene in Argentina's monetary policy, the peso fell about 7.4% on Monday, opening just below ARS25 against the dollar. Argentina's century bond, meanwhile, was offering 87 cents to the dollar on Monday.
The central bank has hiked rates three times to 40% in the last 10 days and the government is negotiating up to $30bn in standby credit with the IMF.
A stronger dollar to open May, rebounding oil prices and the likelihood of increased interest rates have pressured EM currencies, and Argentina's low-liquid peso was hardest hit. The dollar is up about 3.5% in nominal terms since late January, following a two-year depreciation, said James McCormack, Fitch Ratings' global head of sovereigns.
"Dollar funding has been cheap and plentiful, and EMs have responded accordingly," said McCormack in an emailed statement.