Argentina flat as farmers strike one more week; EM investors see low liquidity amid inflation concerns

By Paul A. Harris

St. Louis, May 16 - Emerging market spreads were marginally tighter as the May 12 week came to a quiet close on Friday, according to emerging markets sources.

An investor said that the EMBI Global was going out Friday at a 277 basis points spread to Treasuries.

The source saw Brazil's 12¼% dollar-denominated global bonds due 2030 finishing at 173 bid, 174 offered, unchanged on the day.

Another buy-sider said that Venezuela and Turkey were better on Friday, while Argentina was basically flat.

Argentine strike continues

A portfolio manager told Prospect News on Friday that a stalemate appears to have taken hold in the ongoing struggle between the Argentine government and that country's farmers.

At issue is the government's sliding-scale export tax, particularly on soybeans.

Although the two sides were expected to start negotiations on Thursday, no discussions materialized, according to the portfolio manager, who added that the farmers elected to extend the agricultural strike for another week.

"It seems like the government is not going to back away from the export tax," the investor said.

"The bottom line is that the government doesn't really want to negotiate. They want to impose the tax, and that's it."

This buy-sider said that the strike will soon impact Argentina's agricultural exports.

"The farmers have harvested most of the grains, and that's basically sitting in inventory," the investor said.

"They could still afford to wait for a certain amount of time without exporting."

Wanting transparency

The investor said that Argentina doesn't really have any big financing needs at present because the government is thought to be sitting on about $50 billion in reserves.

"They have projected their financing needs in the external market at around $5 billion," the investor said, adding that the market actually anticipates a lesser amount than that.

"The issue is the rollover for the domestic debt because most of it is linked to inflation," the buy-sider said.

This investor added that Argentine government economists have created a new inflation index, and due to that there is presently very little transparency with respect to real inflation.

"Argentina has actually tightened a little," the investor said.

"The market has really been trading a lot with the issue with the farmers. When they indicated they would negotiate with the government, a couple of days ago, the bonds traded up.

"Now that they have indicated that the strike is going to continue for another week the bonds haven't really moved much.

"We're going back and forth with that issue.

"The main concern in Argentina is the very high inflation rate, and what impact it can have on growth going forward."

Inflation worries in EM

Another emerging markets mutual fund manager who also agreed to speak to Prospect News on background late Friday said that "inflation" is presently the big story throughout the emerging markets.

"Commodity prices are pressuring food inflation," the investor said.

"With the emerging markets having such a high percentage of food in the CPI baskets, food inflation is definitely putting more inflation pressure on emerging economies than on those in the developed world."

This investor said that within emerging markets Asia is probably the most affected by inflation.

"For example," the buy-sider said, "Philippines has 50% of all its CPI basket in food products. Of that, rice alone is about 9%."

Liquidity tight

Meanwhile, liquidity remains tight in the emerging markets, and as a result bonds can move with very little volume, according to a market source.

"Volumes are way down," the source added. "People are not that willing to provide liquidity at this point.

"There have been a few new issues, and most of them have done alright because they came at a concession to the existing bonds, and have traded okay just because of that."

This source added that the market does not anticipate a big calendar in sovereigns anytime soon, adding that most sovereigns are in a good position to await more favorable conditions.

"There are a lot more financing needs in the corporate sector, however" the market source added.

The week ahead

The May 19 to May 24 week will get underway in the primary market with four offerings on the calendar expected to price.

Banco Panamericano has $120 million of two-year eurobonds in the market with 7¼% guidance, to price via Banco Votorantim, Banco Espirito Santo and Unibanco.

Diagnosticos da America SA is marketing $200 million of 10-year unsecured notes (BB-) via Credit Suisse and Merrill Lynch. Initial guidance is 11%.

Argentina-based wind and hydropower producer, IMPSA, plans to sell $40 million of one-year bonds. Guidance is 11%. BCP Securities and Mendoza are running the deal.

And OJSC Russian Agricultural Bank is expected to price dollar-denominated paper (A3/BBB+) via ABN Amro, Citigroup and Goldman Sachs.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.