Hold on to your Argentina bonds, U.S. analysts say
ReutersPlus, Thursday, May 20, 1999 at 12:52
By Apu Sikri
NEW YORK, May 20 (Reuters) - Major U.S. investment banks
are advising clients to hold on to investments in Argentina in
the face of political uncertainty and speculation that the
country may abandon a staunch fixed currency policy.
"It is totally overdone," said David Sekiguchi, analyst at
J.P. Morgan Securities, commenting on speculation that
Argentina may be forced to abandon the peso's peg to the
dollar. The government has vehemently denied that any such plan
is afoot.
"Argentina has legitimate problems, but it has little to do
with the abandoning of convertibility, particularly in the
near-term," Sekiguchi added.
Morgan and several other banks are recommending neutral or
slightly underweight positions in Argentina's bonds relative to
a benchmark market index. But they are advising against selling
current positions.
Analysts cite rising joblessness, a bloated fiscal deficit
and impending presidential elections as reasons for their
caution on Argentina.
Despite these problems, most money managers and analysts
still view Argentina as a more sound economy than Brazil.
That view is reflected in the countries' bond prices.
Brazil's global bonds due 2027 on Thursday traded at 75 while
Argentine bonds of the same maturity traded at 80-1/2.
Carl Ross, analyst at Bear Stearns, has held an underweight
recommendation on Argentina and an overweight on Brazil since
March. But should prices on the debt of the two countries
converge, "Argentina would look cheap," he said.
"The convertibility law is solid, but we are a bit nervous
about how Argentina is going to emerge from this recession,"
said Ross.
Even as it pledges to maintain its dollar peg, Argentina
will have to move quickly on labor reform.
Strong unions and an overemployed public sector are
damaging Argentina's competitiveness more than the fixed
currency, said Rafael de la Fuente, economist at Paribas.
"You need to get as lean and efficient a public and
private sector as possible," said de la Fuente.
"Convertibility is not the issue. Argentina is not a
leveraged economy, so they can easily defend the regime. But
they need to fix the fundamentals -- make the fiscal deficit
more manageable and get a primary surplus that is consistent
with the debt they have to pay down."
Argentina has a currency board that links the peso to the
dollar one-for-one. The country maintains enough dollars to
cover every peso in circulation.
Argentina's export competitiveness came under pressure
after neighboring Brazil let the real currency float in
January.
Investors worry that Argentina may not aggressively attack
its budget problems with elections later this year. Last week,
Argentina announced it would not make previously-pledged cuts
of $280 million in education spending.
Argentina also told the International Monetary Fund last
week that the country's budget deficit would be about $5.1
billion in 1999, or 1.5 percent of gross domestic product,
higher than the $4.95 billion agreed with the IMF in April as
part of a three-year loan program.
Despite slow progress on the economic front, Argentina
should be able to complete external debt financing of another
$3 billion in the international capital markets, analysts said.
"Argentina has always been willing to pay what it takes to
raise debt, $3 billion should not be a problem unless the
market worsens quite a bit," said J.P. Morgan's Sekiguchi.
Copyright 1999, Reuters News Service
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