Provinces prep inflation-linked bonds forbidden by law

Provincial governments, desperate for financing and excluded from international debt markets after defaulting on payments of US$13 billion, are looking for new ways to raise funds in the local bond market.

At least three Argentina provinces are studying the possibility of issuing inflation-linked bonds, according to individuals familiar with the matter. Although regulations have prohibited these types of sales for three decades, lawmakers are considering a temporary extension, aware that local governments have had difficulty financing their deficits or new expenses amid rising inflation and the weakness of the peso.

The provinces need to find new sources of money after about a dozen of them were swept away by the same economic turmoil that caused the sovereign default and were forced to restructure their bonds abroad. This eliminated the possibility that they could raise funds again in those markets in the short term. As peso obligations pile up, officials say it's difficult to tempt investors with longer-term local bonds that don't offer protection against inflation, which is currently more than 40 percent a year.

The federal government is basically saying to the provinces: "Go find the money elsewhere," said Alejo Costa, chief strategist for Argentina at BTG Pactual in Buenos Aires. And the provinces are happy to launch these deals because the local market for inflation-linked bonds in Argentina is quite large and growing.

The provinces of Neuquén, Mendoza and Río Negro are set to issue a total of 10 billion pesos (US$106 million) in inflation-linked bonds, according to individuals familiar with their plans, who asked not to be identified. They could be ready to sell the debt at the end of June if legislative approval comes in time.

Neuquén is considering inflation-linked bonds as part of its debt programme this year, a spokesperson said. Officials from Mendoza and Río Negro did not return messages seeking comment. Argentina's Economy Ministry declined to comment.

Unlike some provinces, whose economies continue to struggle to recover from last year's record contractions, Mendoza, Neuquén and Río Negro have fared better. Mendoza is expected to end the year with a fiscal surplus, and Neuquén and Río Negro have relatively small funding gaps, according to Ramiro Blazquez, chief strategy officer at BancTrust & Co in Buenos Aires.

These provinces depend much less on cash transfers from the government in Buenos Aires, Blazquez said. So they have much more freedom in terms of formulating policies and seeking funding compared to other provinces that depend almost exclusively on transfers from the federal government.

Currently, the provinces are prohibited from issuing price-indexed debt in local markets by a law dating from 1991, when then-president Carlos Menem implemented a currency board to curb the hyperinflation that had plagued Argentina for more than a decade.

There is still a risk that a large amount of inflation-linked debt will end up being unsustainable for the provinces. This is especially true if consumer prices continue to rise faster than provincial tax revenues, a pattern seen in recent years, according to Ursula Cassinerio, a sub-sovereign analyst at Moody's Investors Service in Buenos Aires.

Issuing inflation-linked debt is a risk, Cassinerio said. "But this can be attractive to many issuers competing for liquidity in a very small local market."

This week, the Chamber of Deputies of Congress is scheduled to debate a bill, which was approved by the Senate in February, that would suspend a ban on provinces selling indexed debt for one year on the idea that it could help them stabilize their debt. finance. The bonds would have to have maturities of at least 18 months. The proposal would also prohibit the provinces from increasing their debt balance in dollars. President Alberto Fernández is expected to sign it into law if it passes.

There is likely to be a high demand for any such issue. Inflation in Argentina accelerated to a nine-month high of 46 percent in April, and economists surveyed by the Central Bank estimate it will close the year at 47 percent.