BlackRock says past defaults, next election cap Argentina rally

Argentina’s stellar bond rally is set to hit a wall as next year’s presidential elections revive concern over the country’s turbulent economic past, according to Pablo Goldberg, an emerging markets portfolio manager at BlackRock Inc.

The debt has returned about 8.3 percent this year, more than any other sovereign in Latin America, after the country earned two ratings upgrades. Yet that outperformance is set to fade, he said, as Argentina’s long-standing political risk premium stays stubbornly high.

“If you look at the picture, Argentina’s fundamentals would suggest a much better rating,” Goldberg said. “But when you watch the whole movie, the past still weighs on it.” 

Argentina has defaulted nine times since it’s independence, with the last just six years ago. That history imposes a roughly three-notch penalty in some rating methodologies, according to him, leaving the sovereign rated below where its economic fundamentals alone would place it. 

Now investors are preparing for presidential elections in October next year, in what is likely to be a stark choice between libertarian President Javier Milei and a return to the state interventionist policies of the opposition Peronists. And despite Milei’s success in slowing rampant inflation and stabilizing the currency, the result is no forgone conclusion amid high unemployment.

“Every election in Argentina appears to be so binary,” Goldberg said. “Until the swings of the past are gone and there is a more sustainable path forward, the market will continue to trade with a bit of a premium to get paid for that volatility.”

Fitch Ratings and S&P Global Ratings both upgraded Argentina in the past two months into single-B territory for the first time since 2018. The moves has helped push the extra yield investors demand to hold Argentine debt over its US counterpart to 433 basis points from a high of 1,456 ahead of congressional elections in October last year.

BlackRock’s ETF and mutual-fund portfolios own about 3.3 percent of Argentina’s benchmark 2035 bonds and 4.6 percent of its 2030 notes, according to data compiled by Bloomberg. 

Delayed comeback

Milei has slashed inflation to about 33 percent from almost 300 percent, while erasing the fiscal deficit and stepping up reserve accumulation. Those policies have stabilised the peso, which has weakened less than two percent this year, on track for its best year since 2006. 

Yet investors remain reluctant to value the country solely on its improving economic fundamentals because of its history of recurring debt restructurings and abrupt policy shifts. That, in turn, has led Economy Minister Luis Caputo to delay a comeback to international debt markets, arguing that borrowing costs remain too high even as Argentina faces mounting repayments in some of its global bonds ahead.

“There is a wall of maturities building over the next couple of years, and buying some insurance against this would help,” Goldberg said. “Maybe right now you do it at a higher yield than you would like, but just getting into the process is going to be important.” 

Jobs market

The government’s success in combating inflation and normalizing the economy helped Milei score a landslide win in midterm elections last year, reviving the rally in bonds. But investors remain skeptical whether it will be enough to convince people to give him a second term next year, specially as concerns over the job market grow.

Unemployment rose to 7.8 percent in the first quarter from 7.5 percent three months earlier, while recent data suggest economic activity has moderated following last year’s rebound.

“Growth is doing well, but concentrated in sectors that are somewhat less intensive in job creation,” Goldberg said. “What appears to be increasingly important is jobs, because those translate into votes. This is what everybody is going to be looking at.”