Will Argentina pay warrants? Likely in 2013, not next year

By Caroline Stauffer, Reuters

BUENOS AIRES — Argentina is on track to post strong enough economic growth in 2013 to trigger billions of dollars in bond warrant payments, but the uptick will likely prove short-lived, leaving warrant holders empty handed in 2014. President Cristina Fernandez has prioritized economic growth ahead of an October mid-term election that will determine whether she keeps control of Congress. The 60-year-old Peronist leader promises 4.4 percent economic expansion in 2013 on the back of strong soy and corn harvests. To pump life into Latin America’s third largest economy, her government has used extra government spending to temporarily reverse the effects of currency and capital controls she imposed shortly after starting her second term in late 2011. Economic activity jumped 7.8 percent in May and 7 percent in April, well above forecasts. Even private economists, long skeptical of the veracity of Argentina’s official data, now expect official 2013 growth above the 3.22 percent that would require the warrant payments. So Argentina will likely have to dip into diminishing foreign currency reserves and pay up to US$3 billion in GDP-linked bond warrants in December 2014, according to seven out of 10 banks and analysis firms surveyed by Reuters in the past week. No one expects 2014 growth to merit another payment. Private growth forecasts for next year range from 0.5 to 2.8 percent, a sign Fernandez’s high-spending, high-growth model will lose steam after the Oct. 27 vote. “The growth is not sustainable — in 2014 we will have a serious financing problem,” Rodolfo Rossi, a former director of Argentina’s central bank, said in an interview. Spend Spend Spend A small, 1.9 percent expansion in 2012 put an end to a decade of galloping growth and prompted Fernandez to raise official annual public spending by 16.8 percent for 2013. Private estimates indicate spending will actually balloon by more than 30 percent this year. Government spending has surpassed income for years and escalated more recently. Argentina’s primary budget surplus, a measure of government finances before debts are serviced, fell by 30 percent in May compared with a year earlier.

Other pro-growth measures, like ordering banks to lend 5 percent of all deposits to small businesses, have pushed up consumer prices, forcing Fernandez to impose price controls on 500 supermarket items. The country’s INDEC statistics agency is widely accused of under-reporting inflation and, to a lesser extent, misreporting growth data. There were suspicions the government lowered growth figures in 2012 to avoid warrant payments. Private estimates put 12-month inflation at about 25 percent in Argentina, one of the highest rates in the world. “The government is making no effort to solve the underlying problem of inflation,” said Fiona Mackie, an Argentina analyst for the Economist Intelligence Unit. “It will be increasingly difficult for it to engineer some sort of easy exit.” Yet Fernandez, who recently raised the minimum wage, frequently tells Argentines they are better off. Consumer confidence rose in June and July according to a survey from the private Di Tella University.